Armstrong, Michael. The Greatest Bull Market In History -- The Great Recession. 573p

Many stories have been written about thethe famous Stock Market Crash of 1929, butI am aware of none that have delved intothe bull market beyond the last few monthsbefore the crash. Countless people havebeen fascinated with the crash and havemade all sorts of false assumptions that thespeculative fever was intensified by marginswhich are only 1O%. That statement iscompletely false and, in fact, many stockswere not available on margin at all. Otherspaint the picture that a vast portion of thepopulation was involved, right down to shoeshine boys. Again, we will see that this wasa gross exaggeration. One book, "The DayThe Bubble Burst," is an excellent account-ing of the social impact of those tryingtimes. The cast of characters is unsurpassedand provides a look into the private lives ofsome of the people who were the biggestplayers.

But from an analytical perspective, theatmosphere that surrounded the market atthat time is a very important area to ex-plore. Far too often, economists and marketanalysts assume that such catastrophes arefreaks in the marketplace and that they willnever happen again. Others try to inject thefamous Kondratieff cycle into the stockmarket and proclaim that the end is near.Some have been calling for a devastatingcollapse ever since 1982 and each year theycrawl out from under their rocks to pro-claim that this is the year that the marketwill collapse to 10 cents on the dollar as thatinfamous month of October approaches.

Other hard-money advocates beat theirchests, warning that everyone must buy goldand claiming that this deflationary wave in

the 1980s is only the beginning of a situationsimilar to that which took place in 1929.But they should go back in history and un-derstand what took place. If they look at asimple chart they would see that the col-lapse from 381 to 40 points on the DowIndustrials took place in the span of threeshort years. Such disasters have alwayscome without warning and the process hasnever dragged out over a period of four tosix years. Normally the pain has always beenswift and to the point and panics are justthat, panics which take their toll in thecourse of one to three years.

It is a widely known fact that nearly 90%of money managers have been unable tobeat the Dow or the S&P in performance.It is always easy for someone on the outsideto look in and criticize a money manager forhis performance. When it comes right downto it, most managers are damned if they doout-perform by critics who say they havebeen too aggressive. If they perform lessthan the Indexes their critics say that if theyhad just bought the Dow stocks they wouldhave been ahead of the game.

Trading any market is difficult to say thevery least. Judging someone’s performanceon the surface tells little about his system orhis analysis. For example, take two mana-gers who both made money on the stockmarket rally between September 1985 andApril 1986. One bought the market becausehe felt that the economy was going to heatup and he realizes that inflation brings withit growth for many industries. The othermanager bought the market because hethought there was going to be a discountrate cut. Both may have made money, but

INTRODUCTION

The Greatest Bull Market In History

1

the gains were based on two totally differ-ent fundamental principles.

The difference between the two managersmay eventually show up only when the fun-damental long-term ideas of one trader orthe other prove to be wrong. Then one willcontinue to make money and the other willsuddenly become a net loser. The loser willchase t he marke t, ine vi tab ly gett ingchopped up back and forth while the otherwill consistently do well if his long-termconcepts remain in the proper perspective.

Therefore, we find that trading managerscome and go not merely for small privateaccounts, but for the big institutions as well.People have a tendency to judge managerson a short-term basis and many scrutinizeeach and every trade, when, in fact, it is thelong-term that counts the most.

The short-term trading or analysis of thestock market has always been the worst.Sure, some analysts have done quite wellcalling the market for short-term moves,but eventually it turns out to be periodicand lacks consistency. The long-term issomething that most people vacillate over,switching their opinions on a short-termbasis from bullish to bearish. How can aninvestor achieve consistency, or at leastmake sure that if he misses a short-termmove, he is not caught on the wrong side ofWall Street?

If you want to know what the future holds,you need a map of the past to at least pro-vide a guide as to what is or is not possible.Far too many people fail to look at theevents of the past as a whole, but single outonly an isolated period to support an un-warranted assumption to arrive at a fore-gone conclusion.

While some argue that 1929 is knockingat our door, others laugh insisting that suchevents are not possible in this day and age.Economists, in their efforts to support theirbiased Keynesian conclusions, attack theprotectionism acts as the cause of the GreatDepression. Others blame the massive col-lapse on the over-speculation that pre-ceded it. In all, most accounts are totallyinaccurate and others lack the details of thereal events during that era because theyhave merely skimmed the surface.

On the contrary, the events which tookplace between 1921 and 1929 are very im-portant. The fundamentals in many areasare the same as we see today and there areundoubtedly many parallels between thepast and the present. However, was theblame for the Great Depression justifiablyput on the stock market? In fact, is the stockmarket the almighty leading indicator tothe economy as it was believed then and asit is still perceived today? Should we belistening to the "warnings" of impendingdisaster or are we on the verge of a new erawhere the Dow industrials will soar to 3500or beyond? How does one get a feeling forwhat the future holds? Should we wait andwatch for moves in the discount rate? Doesthe first up tick in interest rates mean dis-aster cannot be avoided?

One of the best ways to get a grip on thesituation is to clearly define what the mar-ket has done under what conditions. Analy-sis is supposedly the art of taking a knownrelationship or a proven technical methodfrom past performance and projecting whatthe future performance may be. If this is theonly means by which we can objectivelytake a shot at the future, then perhaps it isbest to sort out those fundamental relation-ships and make certain that the stock mar-ke t d oe s r e a ct in t h e m a nne r t ha t


2

"generally" accepted beliefs would have usassume.

One huge problem for most people is anunderstanding of just which fundamentalstruly move the market. At times you findanalysts cheering for deflation and lowerinterest rates, which, in their minds, willentice people to buy stocks. But just thinkabout it for one minute. If deflation is thesituation and the economy cools down,doesn’t business in general also cool off,thereby reducing corporate income?

The generally accepted relationship of thestock market to interest rates has beenh igher rates mean lower stocks. Thethought behind this is that higher rates in-crease the cost of margin. Accordingly,people will buy fewer stocks and thereforestocks must go down. The emphasis hasbeen placed upon the speculation and notthe true economic impact. During the early1920s prior to the crash, the generally ac-cepted fundamental relationship was thatstocks rise with higher rates and declinewith lower rates.

It is true that interest rates collapsed be-tween 1929 and 1932 along with the market.Interest rates collapsed from 1919 to 1921and so did all commodities and stocks aswell. Each depression had been marked bya decline in interest rates and each bullmarket took place when business expandedand borrowed more to fund their expandedlevels of business. It is true that interestrates bottomed in 1976 and rose into 1981while the stock market held the 1974 lowand moved up with the inflationary cycleinto 1981, peaking only slightly ahead ofinterest rates. There was no direct relation-ship to the contrary.

So what is the answer? Does the marketrally with lower rates all the time? Obvi-

ously not! So under what conditions will thestock market rally when higher rates exist?This is just one vital question that needs tobe answered.

The past has a tremendous amount ofknowledge to offer if one merely takes thetime to study what took place. For example,did you realize that foreign loans were alsoa major concern in the 1920s? Did you alsorealize that the economy has always ex-panded only during inflationary times andnever during periods of deflation? But thenwhy do most people say that the stock mar-ket doesn’t do very well against inflation iftrue industrial expansion takes place duringinflationary periods? Is the stock marketoverbought because it stands at its all-timehighs or is it in fact the best buy in 50 years?What about all the takeovers? Is that goodor bad for the market? There was a tremen-dous number of takeovers and mergers be-tween 1927 and 1929 just before the crash.Does that parallel mean it is a warning ofimpending disaster?

Many people are trying to forewarn of amassive collapse in the stock market. Oth-ers say it will remain bullish as long as inter-est rates decline. Still others have honestlyprojected that interest rates will continue todrop into 1989 and the Dow will reach inthe "thousands." A few doom and gloomguys crawl out from under their rocks everyyear to proclaim that October will collapsejust like 1929. Widows and orphans will becast into the streets and suicides will be-come a common everyday event on yourlocal street corner. Earthquakes will strikeWall Street itself and man will be punishedfor being so presumptuous as to have evertaken the Dow above 1,000 in the firstplace.

Well perhaps if those people (who are justoutright mad at the rest of the world for


3

making any profits when they have beenshort every step of the way up) keep crawl-ing out every year, one of these days theymay be right during that fatal October. Butperhaps they should go back and read thenewspapers from 1869. Then it was Sep-tember 24, 1869 which became known as"Black Friday." So maybe they had betterhedge their bets and not let everything rideon October every year. And those peoplewho foolishly think that interest rates willcontinue to ease beyond 1986 had betterread each page of this report twice andcommit it to memory!

Is the Dow really in lofty heights? Howdoes one measure such territory wherecharts have never before dared to enter? Alittle exercise in comparisons might shedsome light on the subject. But then again, itmight not mean anything at all. Neverthe-less, it’s certainly worth exploring.

The Dow Jones Industrials reached a peakof 381.44 in September of 1929. The CPIstood at 51.3. In 1985, when the Dow hit a

new high in July, the CPI stood at 322.8. Ifwe adjust the 1929 high for inflation, we findthat the 1929 high in 1985 terms would be6,064. The CPI has increased 629% since1929. Boy, talk about being a poor invest-ment over the long haul!

Just for the hell of it, let’s see how the Dowheld up to the expansion in the money sup-ply. Money supply (M1) stood at $26.5 bil-lion in 1929 compared to $595.8 billion in1985. That comes out to be a 2,248% in-crease. If the Dow had appreciated in com-parison to the growth in money it should be8,574.77! Well, so it’s lagging a little, bigdeal.

How about a comparison of the Dow topublic debt? In 1929, the public debt stoodat $16.9 billion and in 1985 it has grown upquite impressively to $1.823 trillion, whichworks out to be a 10,787% increase. Obvi-ously, if the Dow had kept up with govern-ment spending it should be 41,145. Boy thatcertainly makes 2,500 seem awfully cheap.


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Well, these comparisons might be therevelation of a lifetime, but then again putthem alongside a dollar and they just mightbuy you a $1 cup of coffee around WallStreet these days.

Is there something in this world which onecan measure anything against to render afair comparison of worth from one day toanother? Ever since we abandoned the goldstandard and moved on to this politicallybacked paper monetary standard, compari-sons seem to be far more difficult to comeup with. There is a huge imbalance fromwhat everything used to be and where itnow stands.

Since we are looking at industrial stocks,perhaps we should use the GNP to comparetheir performance with the production ex-pansion to which these companies contrib-uted. G NP, expressed in constant 1972dollars, stood at $103 billion in 1929. In1985, it stood at $1,671.6 billion ($3.8 tril-lion in current dollars). Therefore, in con-stant terms GNP had grown 1621% since

1929. The Dow would have to stand at 6,183in order to maintain parity with the GNP.

Quite frankly, trying to find somethingagainst which the Dow has performed ap-preciably better is simply not so easy. If wecompare the price of gold to the Dow, wefind that in 1929 gold was $20 and in 1985at the end of July, when the Dow hadreached its new high, gold closed the monthat $327.10 on spot in New York. This is again of 1635.5%, while the Dow from the1929 peak to the July 1985 peak had appre-ciated only 361%. The truth of the matter isthat the only thing I was able to find thatlagged behind the Dow was the increase inthe civil labor force, which stood at 49.2million in 1929 and currently stands at 115.3million, an increase of merely 234%.

Why has the Dow performed so miserablyin comparison to just about every otherindicator and to gold itself? Is there some-thing we are missing? Is there somethingthe Dow has to offer to vindicate itself forsuch a terrible long-term performance? To


5

some degree the answer to that question isyes. Since 1929 the total amount of divi-dends paid on the Dow Industrials has been1305.42 at the end of 1984. If one were toadd this to the July 1985 high, it would beequivalent to nearly 2700.00. Although thisis still a far cry from 6000.00, it is at leastbringing it up a little closer.

Let us look at the Dow in comparison tothe composite book value. In 1937, thebook value was 88.30 while the Dow hadreached a peak on March 10 at 194.40. Thismeant that the Dow was trading at betterthan double the book value. At the end of1984, the composite book value was 916.70,while the Dow closed out the year at1211.57. Obviously, a comparison of thisrally to the rally of 1937 still shows the Dowlagging behind. On the 1973 rally when theDow closed at 1051.70 on January 11, thebook value stood at 690.23. Again, this rallywas shy of the levels achieved during 1937,but the 1985 rally has still not reached theheights of the 1973 rally in comparison tobook value trading ratios.

When we look at the Dow from bookvalue, CPI, GNP or its performance againstgold, it comes up shy every time. Recentrallies are not trading at the same heights asthey have during the past 56 years. By suchfundamental comparisons, it is extremelydifficult to imagine that the Dow is over-priced and in jeopardy of a major paniccollapse.

If we look once again at the chart of theDow Industrials on a percentage basis overbook value, it becomes distinctly clear that1978 was the LOWEST point in recent his-tory. If we look at the annual chart providedfor the Dow Industrials from 1890 to date,we find that the 1978 low was substantiallyabove that major sharp correction whichtook place back in 1974. Even the 1982correction, when almost everyone was call-ing for an impending collapse and the Dowwas unquestionably moving down to 500, itwas still trading on a percentage basis overbook, above the low which had been estab-

Dow Jones Industrial Average: 1937-1982Book Value as % of DJIA High

1937 1942 1947 1952 1957 1962 1967 1972 1977 1982

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%


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lished during 1978, as well as on the indexitself.

What is this book value we speak of? Itrepresents cash and the depreciated valueof all assets, including real estate and othersubsidiaries. This is what the takeover boysare looking at. They look for companiesthat are selling for $30 a share and theycalculate that if they were to sell off all theassets they might end up with $75 a share.We all know that these situations have beennumerous. So why is it a fact that so manycompanies are selling far below bookvalue? Doesn’t this suggest that perhaps themarket is under-priced? If so, then why allthe doom and gloom every time the marketturns downward?

A case can undoubtedly be made for themarket being overpriced or underpriced.Obviously one or the other is eventuallygoing to be right. But which one? Whatdoes the future really hold in store for thestock market? Are we in a phase similar to1921-1929 when prices soared and the Dow

rose from 62 to 381, which was a 515% rallyin seven years? Or perhaps the doom andgloom boys are correct and the Dow willdrop 50% or maybe 88% as it did between1929-1932.

There are some who argue that we areabout to collapse. Others suggest that thefamous Kondratieff cycle is upon us andthat the market will collapse under itsmighty influence. Joseph Granville becameperhaps one of the most famous analysts ofour time because of his strong opinions.Most other analysts envy the attention hegained back in 1982 and love to kick hisname about like a football. But in his recentbook entitled "The Warning," Joe admits:"Probably more than anything else, I by-passed the August 1982 upturn because ofhow the market looked against the tem-plate of the Kondratieff Wave...In relationto the 1982 bottom I had made a timingerror, but I knew my basic analysis wasright."

Dow Jones Industrial Average: 1937-1982Earnings as % of DJIA High

1937 1942 1947 1952 1957 1962 1967 1972 1977 1982

14.00%

13.00%

12.00%

11.00%

10.00%

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%


7

We will see as we explore the market’spast, which to this very day re mainsshrouded in an obscure fog of mystifyingconfusion of untold proportions, that tim-ing has always been the elusive element inanalysis. Wall Street ’s chast isement ofJoseph Granville is typical. Wall Street hasalways sought that infallible analyst whowill descend from the mountain bringingwith him the definitive rules of the game.That elusive mountain has never providedthe man who possessed a record of consis-

tency. No one beat the game in the 1920s.No matter how flawless their record, thecountless analysts of the roaring 20s all lostin the end - including the bears.

And for those who were correct for longperiods of time, Wall Street still bore ahatred when it was wrong and the analystswere proven right. Even the Wall StreetJournal refused at one time to report thecomments of Jesse Livermore despite hissuperb track record. Then other journalists


8

chastised the Wall Street Journal for itspompous attitude.

Like the President of the United States,an analyst is immediately subjected to acontinuous series of criticisms. The Presi-dent is blamed for everything from foreignaffairs to how much money it costs everytime you buy a loaf of bread. It is as if thePresident’s sole existence has caused everyproblem imaginable and, of course, he mustcarry the blame for the errors of each andevery predecessor. The press will judge himbased solely upon what they see, making noallowance whatsoever for any other factors.Problems of all past administrations sud-denly become the track record of the mancurrently in office. Like the interest on theback debt, which haunts each year’s admini-stration, today there still exist serious inter-national and shift ing domest ic events,which were inherited by Hoover when hetook office in 1929.

The art of analysis is, in fact, taking fun-damental concepts built upon the record ofthe past and projecting the assumption thatthe future will offer more of the same. Ifthere has never been that infallible sooth-sayer of the marketplace, then perhaps wehave drawn the wrong conclusions from thepast. The press and the analysts were allbearish in 1982. They judged the marketbased solely upon what was lying in front oftheir noses. They judged the market by cur-rent events and ignored the long-term signsthat were pointing to a new round of inter-nationalism. Oddly enough, the parallels ofthe past were quite similar to the 1980s, ifyou know where to look.

We will explore the avenues of fundamen-tals. We all know the often told storiesabout the speculative frenzy which suppos-edly destroyed the economy and createdthe Great Depression. But do we really

know the truth? Do we honestly know whatcreated the most spectacular bull market inthe history of the stock market? Was ituncontrolled speculation? Was there a re-lationship to the dollar and its postwar his-torical swings? Are the so-called parallelsthat people draw between then and nowvalid? Are these proposed opinions andparallels truly non-biased or have peopleselected only a small segment in time to suittheir own foregone conclusions?

Anyone who takes it upon himself to writeof the events in the past immediately sub-jects himself to becoming some sort of ahistorian. In so doing he injects his ownbiased viewpoint. As a result, the events hechronicles are automatically colored by hisown thoughts and the accounting is still oneman’s opinion. This report will offer a dif-ferent viewpoint of the past. The speakingwill be quoted from those who commentedon the events of the day and the commen-tary offered will be a collective interpreta-tion of what took place.

Let me say now that I too had some pre-conceived ideas when I began this project.But listening to those who cried out fromthe past changed my own unwarranted as-sumptions and, in the end, I emerged witha conclusion quite different from what I hadexpected it to be.


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http://www.pei-intl.com

Preface When I began this project, the name I

originally selected the "The Dow & TheFuture." The more I explored the past, themore it became clear that is was impossibleto discuss purely the stock market withoutinvolving not merely economics, but alsoforeign exchange and commodity pricemovement as well as the events within theeternal sea of politics itself. No matter who takes up the crusade to

write of events long since past, they oftenbegin with some preconceived notion ofwhat may have taken place. Others oftenselect facts which only support their owndistorted or personal views. I should statefor the record that when I began this pro-ject, I was under several false assumptions.The preconceived ideas that I had at theoutset, were completely destroyed in thefinal conclusion. The compiling of all thesefacts and statistics has taken what oftenseemed to be a lifetime, but in the end Ihave emerged with a more clear under-standing of how and why we are now in theposition that we so sadly find ourselves to-day. The political topics which rise to the

surface throughout this work are the factsas they remain. My personal political phi-losophies have been enhanced and rebornby this research and it is not the other wayaround. Although some of the commentarywill undoubtedly be controversial from thepolitical impact of this work, let me state forthe record that I emerged with a clear un-derstanding for the concerns of our forefa-thers of these United States which is soamply stated by the words of Thomas Jef-ferson: "Sometimes it is said that man can-not be trusted with the government of himself.Can he, then, be trusted with the governmentsof others? Or have we found angels in the

forms of kings to govern him? Let historyanswer this question." I believe this book isperhaps one among many which answersthe words of Thomas Jefferson. Just as politics cannot be ignored when

reconstructing a historical review of eco-nomic events, it is also true that we our-selves have a difficult time ignoring ourpreconceived notions of various relation-ships which the markets have with one an-other . These numerous re lat ionshipsbetween various markets and interest ratesare but one aspect of this study and whatyou are about to read will change your pre-conceived notions as it did my own. I willgive you a clue here at the outset. The mostdefinitive relationship that the stock mar-ket has is not with interest rates, but withforeign exchange movement! Beyond themere exploration of the various relation-ships, the one major revelation which willjump out at you as you travel from year toyear reading first hand the contemporaryfundamental explanations of the day, per-ceptions of why and how markets move, hasbeen altered and shaped by the strangeevents of this century. What you may be-lieve right now, tomorrow you may ask howit is possible others could still believe suchthings. As a lover of history, I have explored

countless records of these events far be-yond what is normally taught as part of anyformal educational program. Early in life, Ibecame fascinated with ancient culturesand the origins of civilization itself. Themore I read and explored the archives of thepast, the more I became startled by theamazing parallels from an economic per-spective. It became clear to me that moneyand trade were the two greatest drivingforces which had shaped man’s destiny.

Events and circumstances on the sur-face merely appear to change, but under-neath, the reality of the causes and effectsremained constant from one century to thenext. I was compelled to discover the de-tails, delving perhaps deeper into the pastthan most would have considered worth-while. I was impressed with the manner inwhich Julius Caesar handled a major debtcrisis by calling a moratorium on all interestpayments. The consumer debt, so to speak,had risen substantially, driving interestrates even above the 100% level at times.His actions were undoubtedly the real mo-tive for his assassination since many of thenoble Roman Senators who had thrust theirdaggers deep into his being were the verymoneylenders of the day. I studied the vari-ous monetary reforms of many emperors ofRome and read with amusement how theEmperor Diocletian in 286 AD institutedwage and price controls in an attempt tocurb runaway inflation. As a result, thisstudy also embodies government and itsactions to control the economy of its peo-ple, which is a battle that began at the verydawn of civilization. What was true ofRome has been true of modern society aswell. The parallels are but their waiting tobe seen. What you are about to read is thetriumphs, trials and tribulations of an erariddled with debt, saddled with inflationand crushed by warring trade factions. Throughout history, man has specu-

lated on one thing or another. IT is his verynature to do so. He has bought and soldeverything from slaves and real estate totulips under such a speculative fever. Realestate speculat ion spread throughoutRome when news of Pompey the Great’sde feat by the hand of Caesar came.Throughout my studies of both modern andancient economies, I could not find evenone period which was void of some kind ofspeculative fever. All things which haverisen during waves of speculation have

eventually collapsed in the aftermath.There are no survivors, no exceptions! Thegreat bull market of the Roaring ’20s wasnot unique to man’s record of follies, nor isthe Great Depression and the collapse ofthe Dow Jones Industrials from 386 to 40points in 1932 a freak in the archives ofman’s economic past. Such things are NOTabnormal, but completely NORMAL ! Theyare not the by-product of shoe shine boysscrambling for tips on the stock market, andthey are not the by-product of an unsophis-ticated economic order which we have soingeniously overcome. What took place during the Roaring

’20s and during the aftermath, will one daytake place once again. No matter how manylaws governments may try to write and en-force, it is man’s nature to speculate uponthe future. There were many mutual fundsthat collapsed during the 1930s. The rise incommodity prices into the mid 1970s andthe precious metals which carved theirmonumental high during 1980, were bothsimilar events which took place during thePanic of 1919 preceding one of the GreatestBull Markets in History. As long as manretains his human nature, great waves ofspeculation will engulf the world peri-odically. The only questions are how, whenand why! The greatest driving force behindthe bull market was the exodus of capitalfrom bonds into stocks. That was sparkednot by show shine boys, but by governmentswho overextended. The defaults of SouthAmerica, much of Europe and the aban-donment of the gold standard by Britain allhad their impact in the sage of the 1920s and1930s. That is what this book is all about.

Acknowledgements No book can be written without countless supportive people and of course source materials. I am

extremely grateful to Isabelle Ring and Diane Burroughs for their relentless pursuit in the editing ofthis project. I am deeply grateful to Donna Carrol who assisted me in collecting data for many longand tedious hours in the hallow halls of Princeton University. It is to her that I am also indebted forassembling the relative mementos that appear throughout this project which she extracted fromcontemporary newspapers and magazines of the era. I am also indebted to Susan Greenberg for hersupport, assistance and loyalty throughout this ordeal which often seemed as if it would never end.

I am also grateful to Princeton University, the London School of Economics, Oxford Universityand the British Newspaper Library for the use of their facilities through which much of the researchwas accomplished making this dream a reality.

I am also grateful to Adam Smith and Joseph M. Schumpeter for their devotion to the understandingof economic movement and the invaluable reference works which they have left behind and for theirinfluence upon my own economic thought. The foreign exchange charts that are provided throughout this study have been constructed by

taking the quotations from the Wall Street Journal. The quotes which appear in these charts on amonthly basis are the closing of each month in question. The various indexes on consumer prices, producer prices, business inventories, population, trade,

gross national product etc. have been taken with permission from "Economic Statistics 1900-1983,"published by the Economist magazine of London, England unless otherwise stated.

The advertising that appears throughout this text is not paid for. It is advertising which appearedduring the year in which it has been incorporated within this work. This has been done to providereaders with a sense of the period so that they may read for themselves what those of the era wouldhave also been influenced by at that time. Some of the companies whose advertisements appear inthis work no longer exist. Other are still alive and well. The coupons, I assure you, are no longer validoffers!

I have refrained from employing footnotes throughout this project, electing instead to embodydirectly within the text the sources which have been utilized and why. I have written this work in astyle which is intended to be different; I have provided the sources and then offered by owncommentary thereupon. This is intended to allow you to discover what I myself read holding nothingback and in so doing, perhaps your mind will also be enlightened as to the real causes and effects.

Martin A. Armstrong


CHAPTER I

1921

The year 1921 began on a sour note. Thefront page headline of the New York

Times on January 8, 1921 read: "BUSI-NESS REVIVING, COUNTRY SANEAGAIN, SAYS W.P.G. HARDING - Gov-ernor of the Federal Reserve Board SoundsKeynote of Optimism. DEPRESSION ATAN END - EXTRAVAGANCE HASPASSED." The article began as follows:

"All danger of a disastrous financial col-lapse has passed and there are signs that thewidespread industrial depression is nearingits end, declared W.P.G. Harding, Governorof the Federal Reserve Board, last night ata dinner in Delmonico’s tendered by offi-cials of the Fidelity and Deposit Companyof Maryland to Franklin D. Roosevelt,

lately elected as Vice-President of the insti-tution."

The article went on to say: "Now I think wecan in taking an inventory of our presentsituation, congratulate ourselves upon twothings. One is that the country generallyhas recovered to its normal state. We areno longer afraid. We are not indulging inthe old idea of extravagance, living beyondour means. Nor are we troubled so muchas we were a few weeks ago with that otherextreme of over pessimism, where peopleget down in the tombs and they cannot seeany daylight, cannot see any hope and seenothing but gloom and darkness.

"Now that situation is as bad as the other.They are both abnormal conditions of mindand we can congratulate ourselves gener-

Copyright PEI 1995 All Rights Reserved Worldwide

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ally that the country has reached a morenormal state of mind, if you please. This isnot the time to try any remedies for thepurpose of alleviating or deadening paintemporarily, of which the ultimate effectswould be not to restore the patient tohealth, but to impair his strength and vital-ity.

"We ought to be safe and sound and calmin our judgments in li ving and in financingourselves. I am thoroughly convinced thatany danger which may have existed of ageneral collapse - and I have never thoughtthat danger was as imminent as a greatmany people have thought it was - but anysuch danger as that has passed. I think un-doubtedly that the worst is over. And whilethe Federal Reserve system cannot dealwith individual cases, if there are individu-als who have become so much over-ex-tended that they will have to undergoprocess of readjustment, that, after all , ismerely an individual condition which wil lhave to be taken care of. We will have to letit take its course. The Federal Reserve

deals with general conditions. It deals withthe banking situation as a whole and theReserve position. The inherent strength ofthe Federal Reserve Banks has so muchimproved that you need to have no appre-hension whatever that the Federal Reserveposition cannot take care of the bankingsituation in general. It can do so and it wil ldo so."

The atmosphere during 1921 was far fromoptimistic. There was no analyst, econo-mist, businessman or poli tician who heldvisions in his mind’s eye of a future whichwould one day be remembered as the"Roaring 20s." There is no newsletterwriter or market analyst who dared to claimthat he had called the bottom, no less fore-seen the ominous events.

As with most periods following wars, theabili ty to recover lay solely in man’s desireto re-establish his economic way of li fe.Regaining his dignity and his sense of con-fidence was his only salvation. The panic


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http://www.bog.frb.fed.us

collapse of 1920 was swift, unmerciful, anddevastating.

Many fortunes were lost to the boom andcollapse of the postwar years. Many of theprominent individuals and their personaltragedies we will look at in due course. Thepanic and devastation was not merely con-fined to the United states. Its tentacles hadstretched far and wide throughout Europeon the right and to Japan on the left.

The more I immersed myself in the pastto try to gain a sense of the truth, the moresurprised I became at how the historianshave distorted many of the events. Feelingsin Europe were still very bitter and theTreaty of Versailles had essentially dividedEurope between the British, French andItalians. Turmoil ensued over the Leagueof Nations Agreement in 1919 and the pressin the States was filled with cartoons ofEuropeans still battling among themselvesfor their dominant share of the spoils.

The League of Nations Agreement soughtto preserve the boundaries won in the War

and the French inserted what was known asArticle 10. This mandated that all nationswhich signed would fight against any nationwhich infringed upon the boundaries of an-other. Congress refused to ratify such aclause while President Wilson supportedthe League without any alteration. Indeed,the popular opinion in the United Stateswas not in favor of signing the League ofNations Agreement. Herbert Hooverwrote in his memoirs: "Two million return-ing soldiers were, in the majority, very anti-European. They had little experience withthe peoples of Europe and regarded themas just foreigners." They generally opposedthe League on the ground that they neverwanted to be sent out of the United Statesagain."

In the Fall of 1919, British lobbyists begana campaign to obtain billions of dollars inloans from the U.S. government. Therewere many who were opposed to this ideaand others who saw that lending Federalfunds to Europe would potentially returnhandsome profits for U.S. business.


12


13

Herbert Hoover publicly denounced theproposals beginning on January 7, 1920.Hoover insisted that any loans should bemade from the private sector and that gov-ernment should not get involved. In De-cember, 1920, he addressed the AmericanBanker Association in Chicago. He statedright then and there his opinions upon anissue that later became an underlying prob-lem, which erupted and forged the entireworld into the greatest depression of the20th century. "Our government," Hooversaid, "would be subject to every politicalpressure that desperate foreign statesmencan invent and their groups of nationals inour borders would clamor at the hill ofCongress for special favors to their mothercountries. Our experience in war showsthat foreign governments which are bor-rowing our money on easy terms cannotexpend it with the economy of private indi-viduals and it results in vast waste...Thecollection of a debt to our Treasury from aforeign government sets afoot propagandaagainst our officials, against our govern-ment. There is no court to which govern-

ment can appeal for collection of debt ex-cept a battleship. The whole process is in-volved in inflation, in waste, and in intrigue.The only direct loans of our governmentshould be humane loans to prevent starva-tion. The world must stop this orgy of ex-pend itu re on armament . E uropeangovernments must cease to balance theirbudgets by publishing paper money if ex-change is ever to be righted. The world isnot alone in need for credit machinery. It isin need of economic statesmanship.

To understand the events of the bull mar-ket into 1929, and the subsequent collapse,it is also necessary to understand the periodwhich had led to the greatest bull market inmodern history. During World War I, mostcommodities had been fixed by the U.S.government. One such example was theSugar Equalization Board. This estab-lishment contracted to buy all the sugarcrops from the U.S. as well as from the WestIndian, Hawaiian and Philippine nations.Herbert Hoover recommended to Presi-dent Wilson that the crop of 1919 should be

U.S. CORN PRICES

Date

Per

Bus

hel

(per Bushel)

1861 1871 1881 1891 1901 1911 1921 1931

240

220

200

180

160

140

120

100

80

60

40

20

0


14


15


16

purchased until Europe could re-establishitself. But the President li stened to Profes-sor Taussig who had also sat on the Board.The controls were not renewed and theprice of sugar jumped from 9 cents to 25cents during 1919. This is merely one ex-ample of the drastic speculation in worldmarkets during 1919 into early 1920.

Commodities had literally soared in valueto their highest levels in over 20 years whilemany reached historic highs. Silver ralli edto $1.40 after being as low as 45 cents in1915. Corn reached a record high in 1917at $2.50 per bushel prior to controls and fellback to $1.20. But in early 1920, it reached$2.20 compared to a 1915 price of as low as60 cents. Cotton had soared to 43 centscompared to 7 cents in 1915.

The stock market had also followed suit.The wild speculation during 1919 to 1920was predicated on the fact that most of thecrops in various commodities had been de-stroyed in Europe and they were unques-tionably in short supply. The stock marketralli ed because if commodities rose in

value, so did the profits of American indus-try.

Clearly there was an extravagance ofspeculation following the War. This specu-lation was noted in European markets aswell . I t was undoubtedly a world wideevent. But the world did not deal with thesituation in the same manner.

In the United States, steps were taken tomake money tight, and that the FederalReserve did very nicely. The discount ratehad stood at 4% during 1917. In Decemberof 1917, the Fed began to raise the discountrate, jumping it to 4.5%. That was followedswiftly by another jump to 4.75% in Marchof 1918. There the rate stood throughout1918 and 1919. The Fed waited until thefever of speculation had reached the verytop. In January 1920, they raised the dis-count rate from 4.75% to 6% and then inJune of that year it was raised again to 7%.The Fed had gone into overkill as usual,acting not in advance of a problem but inresponse to it after many of the markets hadalready peaked.

N.Y. Federal Reserve Discount Rate

S W ll St t J l

Rat

e of

Inte

rest

1915 - 1933

1915 1917 1919 1921 1923 1925 1927 1929 1931 1933

7

6

5

4

3

2

1

0


17

This was the U.S. solution to the inflationproblem of the immediate postwar era.They chose to raise interest rates to force adeflation upon the free markets. Had theyleft the markets alone, the same actionwould have followed. As commodities be-gan to come back into production during1920, the markets had already sensed thiswas taking place and were in effect prepar-ing in their own way to correct back in linewith the newly anticipated increase in pro-duction.

In Britain, a different approach was se-lected to bring an end to the speculationfervor which also centered around foreignexchange. There a committee was formedconsisting largely of bankers. This commit-tee became known as the "Cunlife Commit-tee , named afte r its chairman, LordCunlife, Governor of the Bank of England.This distinguished group of bankers hadlittle sense of reality and the decisions thatthey made were the first turn of the screwwhich would eventually led to the greatest

deflationary period in the history of thatnation. As a result of the decisions of Cun-life, the economic devastation suffered inBritain between 1920 and 1922 was actuallyfar worse than the Great Depression of the1930s.

This group of bankers decided that onpaper everything could be brought undercontrol by maintaining the gold standard atthe old parity of $4.86. They believed thatBritain could maintain the old parity andkeep the pound at prewar levels by raisingtaxes and reducing money supply.

There was a great deal of speculation inBritain as to how far the pound would fallonce the War was over. The Cunlife Com-mittee seems to have had no sense of whatthe pound would have actually been worthin a free market and as such the gap be-tween reality and fiction would soon be-come clear.

In August 1918, the Cunlife Committeepublished its first report. They merely

BRITISH POUNDU

.S.D

olla

r pe

r B

ritis

h P

ound

MONTHLY: 1921

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5


18

British Pound

Source: Wall Street Journal

U.S

. dol

lar

per

Brit

ish

poun

d

MONTHLY CLOSINGS: 1900 - 1940

1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939

5.2 5.1 5

4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4

3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1

Great Britain

Yearly: 1900-1932

CPI - ALL ITEMS 1980=100

1900 1905 1910 1915 1920 1925 1930

11

10

9

8

7

6

5

4

3


19

Great Britain

Yearly: 1919-1932

gilt edged yields - 2.5% consols

1919 1924 1929

5.4

5.3

5.2

5.1

5

4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

FRENCH FRANC

U.S

.Dol

lar

per

Fre

nch

Fra

nc

MONTHLY: 1921


0.083

0.082

0.081

0.08

0.079

0.078

0.077

0.076

0.075

0.074

0.073

0.072

0.071

0.07

0.069


20

stated that Britain should live within itsmeans and use revenue to retire most of thewar bond issues held by the banks. Further-more, much of the increase in paper moneywhich was in circulation was also to be re-tired.

When the Armistice was signed on No-vember 11, prices of goods and servicesinitially fell for a four month period in Brit-ain. But then in March 1919, Britain wasforced to abandon the wartime fixed rate of$4.86 on the pound. Between March of1914 and April of 1920, prices in Britainrose more dramatically than in the UnitedStates, increasing by 50%. The primary rea-son was the pound itself. The pound fellliterally straight down to a low of $3.20,illustrating dramatically how overvaluedthe pound had been under the Cunlife rec-ommendations.

To the American, the sudden dramaticrise in the dollar became noticeable onlythrough the means of a drastically lowercommodity value. In a sense, commoditiesdeclined in value, but not as dramatically on

a worldwide basis. To the British, com-modities began to rise because the declin-ing value of the pound was reflected inhigher prices since those base prices werein terms of dollars. Had the commoditiesrisen in terms of dollars, the British wouldnot have seen a rise in price levels of merely50%, but could have experienced nearly a100% price level increase.

Foreign exchange has been a major factorin all markets including stock prices. This,however, has seldom taken part in mostanalytical approaches. Yet as we pourthrough the wealth of price movements, wewill see just how coincidentally tops andbottoms have come into play with foreignexchange movements.

The panic of 1920 was swift and severe,led by the oversupply in commodities andthe drastic price movement in foreign ex-change. The Dow Jones Industrials peakedduring 1919 at nearly the 120 level. The year1920 had opened at slightly above 100 andbegan to fall sharply after the dollar beganto rise abruptly. At the end of 1920, the

SWISS FRANC

U.S

.Dol

lar

per

Sw

iss

Fra

nc

MONTHLY: 1921


0.2

0.195

0.19

0.185

0.18

0.175

0.17

0.165

0.16


21

Industrials closed the year at 71, which wasslightly more than a decline of 40%. Thesharp decline in the stock market hadequaled the rise in the dollar.

Numerous Americans had lost a fortuneduring that decline, yet at the same timesomething strange was taking place. Whilemost were talking about the panic of 1907and deciding that a depression was certainlyat hand, foreign capital from the privateoverseas investor continued to flow into theUnited States.

One rule that we have found through thecourse of our research is that corrections ina market are normally 50% to 60% moves.A trend comes to an end when a declinemoves beyond this percentage level as the88% decline from the 1929 high. The factthat the panic of 1920 was severe is unde-nied, but the fact that the economy survivedis a strong point in its favor as being merelya correction to economic conditions andnot the end of an era.

Europe was still in turmoil followingWorld War I. In Germany, the National

Assembly had been established in 1919 toprovide public elections for the office of thePresident. Paul Von Hindenburg was actu-ally the first and last President elected bythis new constitution. Although World WarI was essentially over with the defeat ofGermany, the world was not completely atrest. The Russian Civil War, which beganJune 1918 between the Soviet Communistsand White Russian forces, had brought withit some international participants. Britishforces had landed at Murmansk in June of1918 followed by the French at Archangelin August 1918. Japan and the United Statesalso sent troops. By 1919 Poland invadedRussia, seeking to regain land over which ithad long claimed ownership. Despite theCivil War, foreign invasion support and theRussian-Polish War, the Soviets eventuallywon. A treaty with Poland was signed onthe 12th of October in 1920 and one monthafterward the Civil War came to an endwhen the White Russian forces under Gen-eral Wrangel were forced to evacuate theCrimea in November 1920.

In January 1921, Greece invaded Turkey.The Turkish forces eventually repelled the

DUTCH GUILDER

U.S

.Dol

lar

per

Dut

ch G

uild

er

MONTHLY: 1921


0.37

0.36

0.35

0.34

0.33

0.32

0.31

0.3


22

attack but the peace did not come until thesigning of the Armistice of Mudanya on the11th of October, 1922.

In Italy, a crisis in democracy had split thenation into moderate and nationalisticcamps. An economic crisis spurred on byraging inflation brought the failure of theCabinets of Giolitti in June 1920 and thesucceeding Cabinet of Giolitti in June 1921.Terrorism became the battle tactic of theFascists against the Socialists. With thecountry breaking apart at the seams, theKing empowered Mussolini to form a Cabi-net in October 1922. By November, Parlia-ment granted unrestr icted powers toMussolini. Eventually in 1926 the finalstages for the Fascist state were in place.

Europe lay in shambles and it was notmerely the world economic structure thathad been seriously fractured, but the veryfoundation of democracy itself. The sideeffect had been a serious curtailment ofinternational trade. Much of the industryhad turned toward armaments, which werea big business. Europe had lost much of its

gold reserves and would continue to do sofor the next few years. By and large, this hadbeen caused by the establishment of indus-tries in neutral overseas countries, such asin Latin America, to process much of its rawmaterials.

Another great problem for Europe, ofcourse, was the extent of damage to produc-tive facilities caused by World War I. Inaddition, the work force had taken a seriousturn. Women represented a greater per-centage of the work force while the menserved on the front lines. Europe was alsohampered in the ear ly 1920s by the"planned" economy of the USSR, which atfirst was a world exporter of food. Russiawould lose its exporter status in the 1930sbut at point its exports hampered Europeanagricultural production through increasingthe supply which in turn depressed prices.

Chaos is a fair word to use in trying todescribe the state of Europe at this point intime. In 1922, a World Economic Confer-ence was finally held in Genoa but theUnited States and Turkey did not partici-

DEUTSCHE MARKU

.S.D

olla

r pe

r D

euts

che

Mar

kMONTHLY: 1921


0.018

0.017

0.016

0.015

0.014

0.013

0.012

0.011

0.01

0.009

0.008

0.007

0.006

0.005

0.004

0.003


23

pate. This conference brought calls for theabandonment of the unchecked printing ofmoney, and the creation of a currency unitfor international exchange based on goldwas proposed as a solution for the economicstrife which faced the world.

The United States had chosen to fight theinflationary pressures that had brought the1919 rally in commodities as well as stocksby jacking the discount rate to what wasthen called the "7% Crisis Level." It did notraise taxes but money supply had con-tracted by 10%, dropping from $23.7 billionin 1920 to $21.5 billion as reflected by M1in 1921. The flight to the dollar from theEuropean currencies caused them to col-lapse, and perhaps aided the U.S. moneysupply which otherwise would have de-clined as much as 20%.

Britain, after abandoning the gold stand-ard, attempted to fight speculation and in-flation by raising taxes and contracting itsmoney supply, forcing the pound to col-lapse from $4.86 to $3.20. But France, Bel-gium and most of the recently created

central and Eastern European nationschose the inflationary road which hadbrought about a flood of unchecked print-ing of paper money. These were essentiallythe three courses of economic action takenby the major industrialized nations. Theflight to U.S. based assets would have amajor role in the years ahead.

The year 1921 was marked by what hadbecome known as the 1921 London Ultima-tum. This British decree demanded theprompt fulfillment of the Peace Treaty,which called for the trial of war criminals,disarmament, and, the most important of alldemands, fixed conditions of payment ofthe reparations by Germany. This Ultima-tum had been preceded by the LondonConference, which had seen the rejectionof the German counter proposals.

The deflationary forces in the UnitedStates, with a sharply rising dollar and aneconomy retaining for the most part its pro-ductive capability, began to attract muchforeign capital. But perhaps the greatestattraction was the inflationary rates in


24

JAPANwholesale prices - all items

1900 1905 1910 1915 1920 1925 1930

0.2

0.19

0.18

0.17

0.16

0.15

0.14

0.13

0.12

0.11

0.1

0.09

0.08

0.07

0.06

ITALYconsumer prices - all items

1900 1905 1910 1915 1920 1925 1930

0.34

0.32

0.3

0.28

0.26

0.24

0.22

0.2

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04


25

FRANCEconsumer prices - all items

1900 1905 1910 1915 1920 1925 1930

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

U.S. CPI1980=100

1900 1907 1914 1921 1928

25

24

23

22

21

20

19

18

17

16

15

14

13

12

11

10


26

Europe between 1910 and 1921: in France,the consumer price index rose from 12 to41; in Britain, it rose from 4.1 to 9.7; inGermany from 18.2 to 265.5; and in Italy,from .06 to .27. in Japan the wholesaleprices rose from .07 to .16 between 1910and 1921 while in the U.S., the CPI rosefrom 11.3 to 21.7. Although this periodwould later be called the deflationaryyears," in the U.S. the cost of living had risensharply but perhaps at a lesser rate than therest of the world.

Interest rates had risen sharply with callmoney (demand deposits) reaching a peakin 1919 of 30%. Even in 1920 call moneyreached a peak of 25% and by 1921 callmoney traded within a range of 9.25% to3.5%. In Britain, interest rates on threemonth average treasury bill rates jumpedfrom 2% in 1912 to 3.4% in 1919 but con-tinued higher in 1920 to 6.2%, decliningslightly to 4.5% in 1921.

It is understandable how depression, bothin the economy as well as in the emotionalstate of the world population, had risen

substantially. Business conditions in theU.S. had been quite brisk. When W.P.G.Harding said: "We are not indulging in theold idea of extravagance," he was referringto the shift of much European manufactureto the U.S. during the war period. Busi-nesses were extravagant, overexpanding asif the trend would continue forever. Manywere simply caught off guard by the sheervelocity of the fail, which was similar to thedecline in the commodity markets between1980 and 1982, yet far worse and in a shortertime span.

The depression of 1920 had not only seri-ously affected the economy within theUnited States, but also the lives of manyindividuals. One such man, who will remainin our writings throughout this period, wasWilliam C. Durant.

In 1908, Durant put together a half dozenautomobile companies and called themGeneral Motors Co. of New Jersey. In1911, he was ousted from control and im-mediately formed Chevrolet Company; inMay 1916, he regained control of General


27

Motors. In the aftermath of the panic of1920, Willy Durant was ousted once againbut this time he would never return to hisbeloved General Motors. Many prominentmen lost their fortunes as the worldwideeconomic convulsions engulfed a world andits people in a swift and sudden blow in theaftermath of World War I.

The sharp collapse in all markets between1920 and 1921 cannot be given proper jus-tice in words, even with the aid of hindsight.Jonathan Ogden Armour, founder of thefamous meat packing company which stillbears his name today, met with perhaps themost unbelievable fate of any tycoon. Ar-mour’s personal fortune had amounted to$150 million at the peak in 1919. No onesuspected that a complete devastation wasabout to take place in all markets fromcommodities to stocks. Armour suppliedthe bulk of meat and grain supplies to theAllies during World War I. At the end ofthe war he found himself overstocked andoverexpanded along with everyone else.

When all markets broke in a state of panic,the slide was straight down. Armour’s vastfortune in today’s terms, adjusted for infla-tion, would be $107 billion. Nonetheless, helost $1 million dollars each day for 130 daysstraight without exception. He eventuallydied in 1927 while living in England, totallyinsolvent and owing a lot of money. Therereally are no words one can find which arecapable of describing the personal tragedythat this once great supporter of freedomsuffered during the panic of 1920. Swift andfast, the fortunes of many disappearedalong with that of Jonathan Armour in thefirst 130 days of that panic. In an interviewshortly before his death, he commented onhis past and stated that he held the distinc-tion in history of losing more money thananyone ever before. This was the atmos-phere which surrounded the financial mar-kets and the investment community at thattime. The severity of the decline had stirredthe memories of those horrifying days of thepanic of 1907.

The Dow Industrials were initially steadyas 1921 was ushered in. It was trading above


28

the 1920 low and continued in a sidewayspattern rising into April. Then without no-tice, it began to collapse in May once againsimultaneously with the rise in the dollar.Fears suddenly rose and the doom andgloomers were now predicting almost theend of civilization itself. How much morecould society endure?

Despite the fact that January throughMarch brought stable prices in the stockmarket, investors and traders remainedvery nervous. As the market rose into April,the Treasury released its report which re-vealed another deficit. This coupled with alabor crisis raging nearly out of control inBritain, and the end of military purchasesof commodities from the Europeans, sentthe stocks down that May. The downwardpressures continued into June, steadiedsomewhat in July, and then plunged loweragain into August. The pessimism contin-ued despite the bright words or promisesfrom the Fed. By September, 20,000 busi-ness failures had taken place and 3.5 millionAmericans were unemployed. Even the

great mail order house of Sears Roebuckchalked up an operating loss of $16,435,468by the end of 1921, while MontgomeryWard revealed a loss of $9,887,396. Eventu-ally, the year 1921 would become known asthe "Year of Deflation."

The world itself was in turmoil. In Britain,unemployment reached 2.5 million in Julyof 1921, one month before the Dow bot-tomed in the U.S. That was the peak inunemployment for both Britain and theUnited States but this would not be knownfor nearly two years.

Moreover, the rest of the world was stilltorn apart by the depression. A revolutiontook place in Portugal after one of the foun-ders of the republic was assassinated. InJapan, the trend continued as Prime Minis-ter Takashi Hara was assassinated on No-vember 4. In Persia, there was a bloodlesscoup but in Morocco in July, the Spanisharmy was defeated by the Rifs. GeneralFernandez Silvestre committed suicide,


29

creating a political crisis in Madrid whichnearly destroyed the government.

1921 was also the year when the "NewEconomic Policy" was announced by Niko-lai Lenin in Russia. The U.S. Secretary ofState, Charles E. Hughes, denied Russia’srequests to resume trade relations and thecold war began as long as Communism pre-vailed.

But the stock market survived, and 1921held at near the 62 point level, which wasabove the previous major low established in1915 at 54 points. As the world drew nearerto its own economic destruction and des-perate, hungry people began to flock to-ward the idealistic goals and dreams ofCommunism, some strange and invisiblehand was making its presence felt. At thepeak of pessimism and the deplorable newsthat couldn’t possibly have been worse, themarket held while short interest climbed.

In the midst of depression the AmericanStock Exchange had its beginnings fromwhat had been known as the New York

Curb Exchange. This exchange literally ob-tained its name from the location of itstransactions. Clerks would position them-selves on the streets signaling to tradersperched in various windows along thestreet. But finally in 1921, they moved offthe street corners and into their own build-ing at Trinity Place. This was perhaps asubtle hint that just maybe the financialsystem of the marketplace would cheatdeath one more time.

The Dow Jones Industrials had come un-der pressure because unemployment washigh, business activity was low, and businessfailures were still rising into 1921 as a resultof the Depression. The call money rates hadsubsided from the 30% high of 1919 but theFederal Reserve was not too quick to act.In the midst of the panic in 1919 the dis-count rate stood at 4.75%. Despite the factthat all markets were collapsing, money be-came tight and in January 1920, the Fedraised the rate to 6% from 4.75% in a singlemove. The markets literally crumbled asthe Fed tried to smash the inflationary wavewhich had ensued.

Great BritainP

ER

CE

NT

labor market: unemployment

1900 1905 1910 1915 1920 1925 1930

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

0


30

In June of 1920, the Fed again raised thediscount rate a full point to 7% trying toinsure that inflation would come to an end.There the rate stood until May 1921, whenonly after devastating the economy did theFed perhaps realize that it had gone into anoverkill mode of operation. In May 1921,the discount rate was cut to 6.5% but obvi-ously the economy and the emotions of thepublic were not impressed. Again, in June,the Fed cut the discount rate to 6% but theDow Industrials still were not impressedand the market collapsed to 65 points. InJuly, the Fed cut the discount rate again to5.5% and the market merely consolidated.In August, the Fed took no action but themarkets sold off violently with the DowIndustrials reaching their final low at 64 forthe entire panic of 1919 to 1921.

Despite the Federal Reserve’s actions tofinally lower the rates, their measures hadlittle, if any, effect. In September, the Fedcut the discount rate to 5% but still it re-mained above 1919 leve ls. Octoberbrought no change but pessimism was still

high. In November, the Fed cut the rateagain to 4.5% where it remained for thebalance of the year.

Germany began making payments ac-cording to the reparations agreement andgold reserves climbed to their highest pointsince 1917 in the United States. The rail-roads dropped sharply from January di-rectly into April. There was a rally in earlyMay but then a sudden, violent collapse intoJune. Perhaps it was a subtle signal thatAugust would be the final low for the indus-trials and also the turning point for theeconomy since the railroads failed to makea new low and instead supported prior tothe industrials.

Despite the fact that interest rates wereeasing, the bonds were performing terribly.They continued to decline directly intoJune as confidence was in short supply.Even the discount rate cuts didn’t help thebonds as they only moved lower on thatnews. People became afraid of bonds asforeign governments teetered on the brink

Changes in N.Y. Fed Discount RateR

ate

of In

tere

st in

%1921

J

7

6

5

4

3

2

1

0


31

of financial ruin. Many questioned eventhe soundness of U.S. bond issues.

In the New York Times in July of 1921 thecommentary under the Financial Columnechoed the disappointed national tone:

"Looking back at the completed half yearof 1921, the prevalent feeling is unmistak-ably one of disappointment. There wasmanifestly strong belief six months ago thatthe money market would revive, that thedecline in commodity prices would end, andthat mercantile trade in the spring monthswould reflect the stimulating influence ofaccumulating needs, of real consumers atthe lower level of prices. None of thesethings has happened in accordance with thehopes of January.

"Money is not as tight as in 1920 but it isdearer and far less easy to obtain than in1919 or in wartime. The investment bondmarket, after a brief recovery, has sunkback into apathy. Its present prices are notonly below those of the January ‘reinvest-

ment movement’ but substantially underthose of last October. The pace of the fallin commodity prices slackened in earlysummer, but the average decline continuedand, with its continuance, demand from theretail trade remained cautious and hesitant;the trade revival did not come. The stockmarket, meantime, continued to fall to alower range of values after each temporaryrecovery, and as lately as June was governedby heavy liquidation for the account of em-barrassed millionaire speculators of 1920."

As is the case today, people are movedonly by that which lies before their owneyes. The fundamentalists, who cannot seebeyond the next round of figures, failedthen as they still fail today to foresee thesubtle changes in trend and sentiment. Aswe continue through our accounting of thegreatest bull market in the history of theUnited States, and the world for that mat-ter, it will become blatantly clear that de-spite the sharp rise in the stock market intothe late 1920s, the analysts wouldn’t believe


32

it and continued to cry depression for manyyears to come.

At this time, the economist Schumpeterformulated his economic theory, which hasstood in direct contrast to both Keynes andMarx. Schumpeter’s theory was centeredaround his concept of innovation. He be-lieved that economic waves of prosperitybegin because of some innovation thathelps to broaden the economy. Once theprosperity peaks, the resulting collapsecomes about due to the lack of some newinnovation. Therefore, the over expansionresults in too much competition, which re-duces profits and forces the weakest out ofbusiness.

The bottom in the stock market in 1921can be safely attributed to several reasons.The most important, a purely technical rea-son, was that the economy was fundamen-tally sound and despite the collapse in theagricultural sector, industry was expandingupon new frontiers with bright new ideasand the traditional spirit of American inno-

vation. The first coast-to-coast airplaneflights had been achieved and airmail serv-ice began to take off, so to speak, at the postoffice. This carried over into many otherareas and helped to broaden the businessconnections which could be vital for futureeconomic expansion.

The automobile industry became a risingstar and by 1922, Henry Ford was pro-claimed by the Associated Press to be abillionaire making $264,000 per day. TheLincoln Motor Company was started in1921 and was bought by Ford in 1922 for $12million. In 1922, Durant Motors come outwith the "Star," priced at $348 to competewith Henry Ford’s Model-T, an attempt byWilly to regain his former fame and influ-ence. Chevrolet began to use Du Pontpaints and offered cars in a variety of colors.Hudson, Deusenberg and Checker MotorsCorporation also joined America’s latestindustrial innovation, the automobile. Fordespite the doom and gloom sayers, thosewho had money were buying cars. Perhapsstill in the stages of infancy, the auto indus-


33


34

try was embarking on a new age of industri-alism. It was Schumpeter’s Theory of Inno-vation that saved the decline and fall of theU.S. financial system.

The devastation of the 1920 panic and thatof early 1921 was senselessly brought aboutby a government which was incorrect in itsassessment of the economy and its fear ofinflation. The overkill tactics of the FederalReserve were a serious mistake whichwould carve a cold image in the minds ofmany for years to come.


35


CHAPTER II

1922

Germany had met the British Ultimatumand begun its reparation payments, but

economically Germany would not be ableto repay for all the damage of World War I.German coal production rose from 219.4 to256.3 million tons between 1920 and 1922but social unrest brought riots and a col-lapse in productivity. By 1923, coal produc-tion dropped to 180.4 million tons whilesteel production fell from 11.71 million tonsin 1922 to 6.31 million tons in 1923. Exportsin general had fallen 40% from their 1913levels. Industrial disputes rose to theirhighest levels of 1,785 incidents, a recordwhich still stands to this day.

The postwar era was definitely marked byinflationary pressures around the world.The United States chose the deflationarymethod we have discussed through actions

taken on the part of the Federal Reserve.Britain chose to raise taxes, an old favoritein that political structure. But Germanychose the unchecked wholesale printing ofmoney. Perhaps it had no choice with thedemands placed upon it by the world. It wasa little absurd to expect a nation that wasdestroyed by the War to suddenly profitfrom world trade to such an extent that itwould be able to pay for the reconstructionof the rest of the world.

The strain was simply unbearable as re-flected by the desperate condition of themark. The German mark began to fallfaster than anyone could have possiblyimagined. At first it fall to 162 to the U.S.dollar, then down to 11,000 to the dollar bythe end of 1922. Confidence of the Germanpeople had been destroyed. ChancellorWilheim Writhe, who had been elected in

DEUTSCHE MARK

U.S

.Dol

lar

per

Deu

tsch

e M

ark

MONTHLY: 1922


0.014

0.013

0.012

0.011

0.01

0.009

0.008

0.007

0.006

0.005

0.004

0.003

0.002

0.001

0


36


37

1921, was forced to resign over the repara-tions issue in 1922. He was replaced byChancellor Wilheim Cund in 1922 but bynow he could not stop the onslaught in lossof confidence.

In Britain, the producer price index de-clined from the 1921 level, falling from 7.9to 6.5 in 1922. The consumer price indexfell from 9.7 to 7.9 in 1922 but these gainswere made at the serious expense of itspopulation through the drastic increases intaxation and reduction in money. Thiswould eventually prove to be a major deter-rent toward recovery in the years ahead andleave Britain as a debtor nation counting onpayments from Germany which wouldnever come.

In France, their CPI fell from .41 to .39between 1921 and 1922 while in the UnitedStates the gross national product rose from12.7 in 1921 to 14.9 in 1922. U.S. industrialproduction was rising sharply between 1921and 1922 but this was largely ignored by theanalysts as a temporary situation. Raw steel

production rose from 20.9 million tons to35.3 in 1922 and passenger car productionrose from 1.4 million to 2.2 million. Copperproduction rose from 437.5 million tons to670.3 Obviously something was takingplace which should not have been ignored.

In the United States, the Federal Reservecontinued to ease as foreign capital contin-ued to gravitate towards its economy. InJune 1922, the Fed cut the discount ratefrom 4.5% back to 4% which is where it hadstood between 1915 to 1917. The Dow Industrials had rallied for nine

months straight since the August 1921 low.By May 1922, the industrials were nearingthe 100 level once again. Oddly enough, theJune discount rate saw the market correctfor the first time. After the June consolida-tion, the market resumed higher, reachinga peak in October. Many viewed the dis-count rate cut as bearish and as a signal thata depression would resume. November1922 provided a sharp correction and De-cember closed slightly below the 100 level.

Dow Jones Industrial IndexMONTHLY: 1921 - 1932

1921 1923 1925 1927 1929 1931 1933

400

350

300

250

200

150

100

50

0


38

The year 1922 was a strange year indeed.The boom in the economy was again highlyinfluenced by favorable overseas investors.The British pound had rallied from its dras-tic decline of 1920. During 1921, the poundhad rallied during the first quarter, reaching$3.95 in April but falling sharply back to$3.56 in July, bottoming one month prior tothe turn in the Dow Jones Industrials. Byyear end, the pound had staged a comeback,closing December 1921 at $4.21. Thepound continued higher in 1922 but at aslightly less aggressive pace, peaking duringMay at $4.45 and consolidating into Sep-tember down to $4.38. But by year end, thepound resumed its uptrend, closing De-cember 1922 at $4.63.

The stock market was moving higher fromits 1921 low, once again following the oppo-site trend of the dollar. The economy wasbooming in many sectors yet by and largethe press remained negative. The housingconstruction figures are reflective of howthe consumer was apparently doing betterthan the professional stock traders. Thefollowing table illustrates the housingboom that was taking place:

Dwelling Units Constructed

1921....449,0001922....716,0001923....817,0001924....893,0001925....937,0001926....849,0001927....810,0001928....753,0001929....509.000

There was nearly a 35% increase in theconstruction industry between 1921 and1922. This was the sharpest rise for theentire period known as the Roaring 20s.Once the peak was reached in 1925, even1939 levels would be 20% below that whichwas recorded during 1922.

One issue that also helped the U.S. mar-kets at that time was the severity of theforeign loan situation. In February 1922,President Harding called a conference atthe White House. In attendance were Sec-retaries Hoover, Hughes and Mellon, alongwith representatives from the banking in-dustry and the bond- issuing houses. Presi-dent Harding had become alarmed at thenumber of foreign bond issues which werebeing floated in the States. Individualsfrom overseas, as well as representativesfrom foreign governments, were coming tothe U.S. financial markets to raise capital.They offered rates between 5% and 8% toattract badly needed capital. As the moneyhad flowed to the U.S. from overseas inves-tors, Europe’s cash flow was in jeopardy.Many became concerned over the securityof many of those bond issues and the out-flow of capital had even driven the dollardown on foreign exchange markets.

It was agreed at the White House confer-ence in early 1922 that any foreign bondissue be submitted to the State Departmentfor its opinion. The State Department inturn referred the submission to the depart-ments of Commerce and the Treasury. TheCommerce Department ventured theiropinion as to the security and repaymentability of the intended borrower, whereasthe Treasury ruled on governmental issuesas to their political desirability. A publicnotice to that effect was eventually made onMarch 3, 1922.

The big New York banks complainedabout the restrictions and, in fact, the Gov-ernor of the New York Federal Reserve,Benjamin Strong, filed a protest with theState Department in April 1922. BenjaminStrong would eventually, in my opinion, al-most single-handedly create much of thedamage that caused the panic of 1929. Dueto Strong’s attack upon this policy, Presi-


39


40


41

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

nd

MONTHLY: 1922


4.65

4.6

4.55

4.5

4.45

4.4

4.35

4.3

4.25


42

DUTCH GUILDERU

.S.D

olla

r pe

r D

utch

Gui

lder

MONTHLY: 1922


0.396

0.394

0.392

0.39

0.388

0.386

0.384

0.382

0.38

0.378

0.376

0.374

0.372

0.37

0.368

FRENCH FRANC

U.S

.Dol

lar

per

Fre

nch

Fra

nc

MONTHLY: 1922


0.094

0.092

0.09

0.088

0.086

0.084

0.082

0.08

0.078

0.076

0.074

0.072

0.07

0.068


43

SWISS FRANCU

.S.D

olla

r pe

r S

wis

s F

ranc

MONTHLY: 1922


0.196

0.195

0.194

0.193

0.192

0.191

0.19

0.189

0.188

0.187

0.186

0.185

0.184

0.183

0.182

0.181

0.18

Changes in N.Y. Fed Discount Rate

Rat

e of

Inte

rest

in %

1922

J

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0


44

dent Harding retreated and reduced therestrictions to merely passing its opinionupon the foreign political implications of aforeign bond issue. This was a serious errorthat would eventually come back to hauntthe stability of the entire economic struc-ture.

The year 1922 was a year of strange pros-perity. Passenger car production soared torecord levels well above those of 1917 and1920. The CPI declined from 1921, stillyielding a sense of deflation that aided inthe confusion for many analysts. Producerprices declined by a mere fraction whileGNP rose to new record highs. Businessinventories had reached a record swingfrom a plus $12 billion in 1920 down to anegative in 1921. Inventories rose onlyslightly in 1922, reflecting that many goodshad actually fallen into short supply. Unem-ployment dropped from the 1921 recordhigh of 11.7% in 1921 to 6.7% yet exportswere beginning to decline, indicating thatmuch of the boom was created by a buoyantdomestic recovery.

All things considered, the greatest importof the United States during the 1921 periodhad been foreign private capital. This in-flow helped support the stock market andadded greatly to the recovery of 1922. Butby the end of 1922, U.S. exports had de-clined and foreign bond issues seeking ahome in the U.S. financial community hadchanged the trend in the dollar and set anew invisible hand at work on an interna-tional level to both create and destroy thegreatest bull market in history.


45


As 1923 dawned upon the annals of time,the stock market initially consolidated

to very quiet trading during January, pri-marily on European news. But the DowJones Industrials had held the November1922 low. February suddenly turned with avengeance against the numerous profes-sional short interests. The market stormedstraight up, exceeding the 1922 highs byreaching 104 and closing near that level inFebruary.

The Federal Reserve, in June of 1922, hadlowered the discount rate to 4%, but wheneconomic activity began to rise, the Fedbecame frightened of potential inflation. InFebruary the Fed raised the discount rateabruptly back to 4.5% after the stock mar-ket rallied. But despite this factor, the mar-ket pushed higher into March nearlyreaching 106. Call money had traded be-tween 6% and 2.75% in 1922 and it was inFebruary 1923 when call money peaked at6%, matching the 1922 high and only gradu-ally declining into the summer months,where it bottomed at 3.5% for 1923.

The stock market had become a barome-ter of the general business expectations. Inthe March 24, 1923 edition of Time maga-zine, the financial commentary had this tosay:

"The financial markets reflected the cur-rent situation in general business severalmonths ago; the ‘discounting’ performed bythe stock market last fall is now quite clearto everyone. (Sharp decline from 1922high.) The problem now before the securi-ties markets consists of similarly forecast-ing what the situation will be next autumn.The present rate of industrial productionhas accelerated so swiftly that doubts arenow beginning to be entertained in WallStreet as to the ability of this movement toendure. As a result, prices of shares on theStock Exchange have proved irregular athigh levels, with speculative reactions andrallies of only day to day significance.Meanwhile, gilt-edged bonds have provedsluggish and have shown an unmistakabletendency to decline under the prospect, al-ready realized in some measure, of highermoney rates. Weaker bonds, however, have


46

risen rather than declined in many in-stances, owing to their improved positionfollowing better corporate net earnings.French government dollar issues haveproved strong."

Here we find that the commentary in early1923 chose to take the decline in the stockmarket as a leading indicator, despite thefact that corporate earnings, industrial pro-duction, and the U.S. economy had becomea slowly evolving shelter for foreign capital.Even the French government had beenforced to issue bonds in U.S. dollars in or-der to find a marketplace. The sharply de-clining European economies had set-off ashift in international wealth and investmentwhich favored the U.S. economy. Althoughthe 1922 rally was sharp, swift and largelyfueled by foreign capital flowing from Brit-ain, Germany and France, the true underly-ing trend was not noticed by the analyticalestablishment at that time. Instead, theyremained very pessimistic, perhaps influ-enced by the poor business conditions over-seas and the reluctance of the Dow to punch

through into new territory above the 106level. After all, every time the Dow hadpenetrated above 100 it had always col-lapsed back, as in 1907 and again in 1920.

Europe remained in disarray. In Ger-many, Adolf Hitler was sentenced to fiveyears imprisonment after the failure of theuprising that became known as the 1923Beerhail Putsch in Munich. Germany haddefaulted on its reparations, promptingeven the United States stock market to de-cline to some degree. The French and Bel-gian troops invaded the Ruhr and occupiedthe Memel area near Lithuania. In Ger-many, Chancellor Cumo, called for passiveresistance but his policy yielded little, if any,results. The attacks by extremists on therepublic continued. It was after the "Cabi-net of the Great Coalition" under Chancel-lor Gustav Stresemann when martial lawwas proclaimed in Germany and Hitler wasjailed.

Nonetheless, it was the classic chicken orthe egg dilemma for the U.S. financial mar-


47

kets. Was the sharp decline into 1923, fromthe March high of 87 points into July, anomen of what was to come or was this aconsolidation phase as Europe tried to pickitself up with issuing bonds in dollars?Hindsight has graced us with the ability tonote that the wave of industrial innovationand expansion was the leading factor. Sec-ond, the grave concerns that had broughtcapital to the States from Europe were sub-siding after the massive devaluations. Asthe cash eased on its flow into the U.S., thestock market had proved to be a haven forinternational capital. The peak of the mar-ket coincided with the low in the dollar asEuropean currencies began to decline intoearly 1924. The British pound had peakedat $4.70 in March 1923 and fell back onceagain to $4.27 by January 1924.

As we have taught at our seminar pro-grams, the more any market continues totest the same number, the higher the prob-ability of pushing through that level. Thisapplies to support as well as resistance. Inthis case, the Dow had run up to the 100

level four times and failed. Instead of inter-preting that as long-term bullish, it was seenas bearish. This one factor kept many peo-ple off guard for years and, as a result, theyfought the market all the way up, finallyturning bullish only after 1928.

1923 was a very important year. It was theyear during which the markets correctedfrom the first bull market rally in 1922 andas such it was very reflective of the consoli-dation phase of 1984.

On 31 March 1923, Time magazine hadthis commentary to add to the sentimentwhich prevailed:

"A Lesson Learned?"

"That the lesson of 1920 has been remem-bered, if not thoroughly learned, by theaverage American businessman has beenobvious from recent occurrences in the fi-nancial markets. The economic signs of aboom have continued, yet tempered by aspirit of caution. Not merely bankers, but


48

leaders in mercantile circles too are advis-ing against recklessness. The speculatingpublic has grown cautious in the Stock andCotton Exchanges."

As the market began to decline in thespring, proceeding on its way into a summerlow, the caution turned more toward pessi-mism. In the April 28, 1923 edition of Timemagazine the commentary was as follows:

"A general consensus of opinion indicatesthat the recent expansion in production anddistribution has reached its peak. Never-theless, previous fears that this expansionwould broaden into a reckless and unsoundspeculative movement are less keenly felt.The principal markets seem to have at-tained an equilibrium, and the questionnow is whether present industrial and mer-cantile activity can be maintained through-out the year. The predictions of businessleaders are hardly consistent. SecretaryMellon is an out-and-out optimist who seesno evidence of inflation, no cause for alarm,and a long period of prosperity ahead.

Charles M. Schwab is cheerful, but feels itnecessary to caution businessmen againstover-optimism. Charles R. Mitchell, Presi-dent of the National City Bank, recognizespresent prosperity, but warns against thedangers of rising costs produced by over-swift expansion. Much the same positionwas taken by the U.S. Department of Com-merce in a recent bulletin. In the case ofthe stock market, J.L. Livermore, noted op-erator, is more pessimistic. He points outthe large amounts of undigested securitiesnow on the market."

By May of 1923, the market was continu-ing lower and would not reach bottom untilJuly when it would consolidate through asideways trend into a near double bottomchart pattern in October. The Federal Re-serve also believed that they acted prema-ture ly by raising the discount rate inFebruary. With the market dropping backto nearly 92 points in May, the Fed cut thediscount rate back to 4%. In the May 12edition of Time magazine the commentaryreflected the atmosphere surrounding the

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

nd

MONTHLY: 1923


4.7

4.69

4.68

4.67

4.66

4.65

4.64

4.63

4.62

4.61

4.6

4.59

4.58

4.57

4.56

4.55

4.54


49

economy and the market as the trend con-tinued lower:

"The pronounced downward movementon the Stock Exchange has given rise toconjecture by the business world as towhether the peak in business activity hasnot already been reached. The well-knownability of the stock market to ‘discount’ fu-ture conditions has led some business lead-ers to anticipate the autumn situation thisyear with less complacency. Industrialnews, containing as it did reports of pricecuts in oil and weakness in cotton and sugar,tended in general to confirm such less opti-mistic opinions, although April pig produc-tion set another high record. The strongbanking position, however, indicates thatshould present business activity fall off, nosuch tremendous speculative liquidation asthat of 1920 to 1921 will be witnessed, ex-cept possibly to a limited extent in realestate. The check-rein to current expansionof trade and industry will, it is generallyagreed, be afforded by the shortage of la-bor, and the already recognized tendency of

labor to lessen productivity under higherwages, which is usually a sign that the peakof prosperity is not far away."

In the early 1920s, the preoccupation withcommodity prices was much more pro-nounced than it is today concerning theanalysis of the market. With only a fewmonths distance from the strong rally inequities from the 1921 low, it is clear howanalytical minds were still greatly influ-enced by the crash of 1920. Recovery andprosperity were words looked upon withcaution, and despite the sharp rally back upto the higher 1919 levels and the influx offoreign capital fleeing an ever-erodingEuropean situation, bullishness was seri-ously lacking.

Despite the apparently sound conditionsof the business community and steady torising corporate earnings, the general at-mosphere was still greatly concerned thatthe stock market was indicating anothercollapse in the months ahead. People weresensitive to the prior events and feared that

FRENCH FRANC

U.S

.Dol

lar

per

Fre

nch

Fra

nc

MONTHLY: 1923


0.068

0.067

0.066

0.065

0.064

0.063

0.062

0.061

0.06

0.059

0.058

0.057

0.056


50

SWISS FRANC

U.S

.Dol

lar

per

Sw

iss

Fra

ncMONTHLY: 1923


0.188

0.187

0.186

0.185

0.184

0.183

0.182

0.181

0.18

0.179

0.178

0.177

0.176

0.175

0.174

DUTCH GUILDER

U.S

.Dol

lar

per

Dut

ch G

uild

er

MONTHLY: 1923


0.396

0.395

0.394

0.393

0.392

0.391

0.39


51

FEDERAL RESERVE BANK

PE

RC

EN

TYearly: 1900-1940

1900 1907 1914 1921 1928 1935

7

6

5

4

3

2

1

STANDARD & POOR’S INDEX

Source: Economic Statistics

YEARLY: 1900-1940

1900 1908 1916 1924 1932 1940

24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3


52

the stock market was a leading indicatorforewarning of another impending disas-ter.

Inflation was almost nonexistent by offi-cial standards, quite similar to the 1981 to1985 Reagan era. Yet admittedly, peoplewere not yet accustomed to heavy taxation.The income tax had been instituted forWorld War I and had not been repealed.This commentary appeared in the June 4edition of Time magazine:

"Of money, inflation today there is almostnone. But inflation of land and real estatevalues, inflation in prices produced by in-equitable and excessive taxation are obvi-ously factors in the present situation.Sudden liquidation through a collapse inany of these is quite improbable; a gradualdying out of the present boom is morelikely. Such an outcome the fitful ups anddowns of the stock market today are appar-ently reflecting some distance in advance ofthe event."

Opinion began to look upon the high levelof taxation as creating real inflation wheregovernment claimed none existed. Thiswas one factor which was looked upon as aserious reason for a slow death of the short-lived prosperity during 1922 to 1923 in theminds of the analysts in those days.

This stands in contrast to the majority ofthought in the analytical world today. Ar-thur Laffer’s ideas of excessive taxationbringing prosperity to an end are nothingnew; they are actually a pre-1929 conceptleftover from the days when Adam Smith,rather than Keynes, was regarded as thefather of economics in the post-1929 era.Today those concepts are gone and a com-pletely opposite way of thinking exists.Most analysts now look upon tax hikes as ameans to reduce inflation and thereforehave cheered for such action and purchasedstocks. Strangely, analysts believe that insome way it is better to prevent the privatesector from making too much, for thatwould lead to inflation which erodes theunderlying value of stocks as it does with

CONSUMER PRICE INDEXannual rate of change

1901 1906 1911 1916 1921 1926

0.2

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08

-0.1

-0.12


53

bonds. They somehow lost sight of the ef-fects of a huge bureaucracy sucking up toomuch of the working capital within the pri-vate sector. Perhaps they never realizedthat economically the only difference be-tween capitalism and communism today isthat communism takes 100% whereas capi-talism takes 50%. The higher the tax shel-ter , the closer an economy comes todestruction.

As the market approached the first low inJuly 1923, three stock brokerage firms wentbankrupt. Most bankruptcies were causedby the sharp decline in the stock pricesthemselves. This had an adverse effectupon the market as it consolidated throughthe summer months only intensifying thefears of a renewed depression. But interestrates were not yielding to what most peoplehad thought to be normal. Most commen-tary remarked specifically about the highrates, citing that if they declined it wouldconfirm a depression through the lack ofcorporate demand. The discount rates atthe New York Fed stood at 4% after the

May cut. In June the Fed lowered the dis-count rate to 3.5% where it remained untilAugust 1924. This action did not supportthe market, but rather intensified the fearsof a depression.

On July 5, the Bank of England hit themarket with a surprise by raising its dis-count rates to 4%; it had previously re-mained unchanged at 3% since June 15,1922. The 4% rate was just a point underthe U.S. rate and the financial analystsboasted that this proved that the N.Y. finan-cial markets were the leaders in the worldand that Britain, as well as all other nations,would have to realize that the U.S. marketswere the dominant forces. They saw nohope for Britain until the pound returnedto the then so-called par value at $4.86 withthe dollar.

We can see that July continued lower andactually provided the lowest monthly closeon the Dow Industrials for that year. In theJuly 30 edition of Time magazine, the fol-


Rat

e of

Inte

rest

in %

1923

J

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0


54

lowing commentary appeared when thestock market was at its lowest point in 1923:

"The impending German collapse, theagricultural depression and the likelihoodof radical and deeply harmful legislation inWashington next winter continue to heavilyoverhang the markets. As a sign of thetimes, it is reported that seashore cottagesdo not rent quite so readily this summer aslast. Money is easy, though rates are firm."

The atmosphere was still quite depressed.People just could not possibly see the stockmarket rising as long as commodities them-selves remained depressed. This relation-ship of the market to commodities hadbecome fairly well entrenched, particularlysince the stock market peaked in 1919 pre-cisely along with the entire commoditygroup from metals to agriculture. The per-ception of declining commodity prices wasviewed as lower profits in agriculture, lesstraffic in freight and thereby less demand,which posed an adverse effect upon theentire marketplace. This is a theory that isnot even remotely used in this day and age.Interest rates were a concern, but at thesame time higher interest rates were notinterpreted as being very bearish. Theyrecognized the fact that as business ex-panded, the demand for money also rose.For them the shocking thing was to see easymoney with firm rates.

At the peak of pessimism, August pro-vided a sharp correction back up, which wasa bit of a surprise. At the same time, it wasviewed as merely a reaction and of no realimportance given the serious events ofthose times. It was reported in Time maga-zine on August 13, 1923 as follows:

"The comparative steadiness of prices af-ter the unexpected death of PresidentHarding has been all the more remarkable

for coming in the midst of an obviously‘bear’ stock market."

The business section had carried a fewinteresting articles which apparently weresigns that the underlying economy was stillsound, yet everyone chose to ignore themat the time.

Studebaker’s profits for the quarter end-ing June 30, 1923, showed net sales of$49,370,091 as against $45,606,044 for thesame period during the boom in 1922. Evenafter expenses, the second quarter of 1923provided a $7.2 million net profit comparedto 1922, which provided a $7 million profit.This is only one example of how corporateprofits were continuing to grow despite thefact that the financial community was over-concerned about a potential depression.

It seems to be only natural for people tobelieve that once a certain set of circum-stances become reality, that the same set ofcircumstances will continue in motion fromthere on out until the end of time. Here wedistinctly found that the so-called experts ineconomic and financial analysis were allvery bearish and looked upon the fall aspotentially leading toward a depression.They believed that the strong economicsigns were merely lagging and that the stockmarket was a leading indicator to futurebusiness conditions. They saw easy moneyyet firm rates. This they felt was not a clearsign that capital was in demand, and if itwere not, then expansion must be slowing.These types of analysis on the fundamentallevel stand in contrast to what is normallybelieved today. Yet, at the same time in1985, and back in 1982, people refused tobelieve that the rally in the stock marketwas indicative of anything at all other thana strange event which had to correct backdown.


55

In the August 20, 1923 edition of Timemagazine we found additional commen-tary:

"The prophets of economic disaster haveso long pointed out the dangers to Germanyin hopelessly inflating her paper currencythat Wall Street has become blase to theimpending financial collapse of Germany.News this week was obviously still-cre-scendo-all previous price and currency re-cords were as usual outdone, as thelong-prophesied political overturn arrived.Yet the view was taken that Germany hadalready ruined herself, and just how long itwould take her to find it out made littledifference to domestic business."

What everyone couldn’t figure out wasthat the collapse of Germany through herhyperinflation was supposed to be an illomen for the world. Many had assertedthat the downfall of Germany would even-tually cause other defaults throughoutEurope, which in turn would depress theU.S. economy. Talk of this scenario hadbegun in early April. Therefore, the stockmarket had begun to decline in unison withthe rise in the dollar from March 1923.

However, as this news became widelydiscussed in June and July and the pressbegan its hype, it was as if the news wasalready discounted. The U.S. stock marketbottomed in July and rallied sharply in Au-gust. September dropped back down againbut held the July low. In October, the mar-ket made a new low for the year but closedabove the July low. The dollar continued tostrengthen into January and the stock mar-ket rallied as well. Foreign capital onceagain began to flow toward the U.S. market,moving directly into equities as a safe havenfrom European turmoil. This provided thebase building during the mid-1923 session,a scenario which had not been discussed.

In addition to Harding’s death and thepending collapse of Germany, the summerof 1923 presented more problems interna-tionally. A massive earthquake had struckJapan and seriously disrupted her produc-tivity. Again debate was two-sided but oncemore the doom and gloom was put forth.The stock market dropped sharply into theend of September as it prepared to make itsfinal low in October.

On 17 September 1923, Time magazineonce again reported the debate:

"The Japanese earthquake proved agloomy influence in financial London, ow-ing to the extensive British investments andinterests throughout the Orient. In NewYork during the past week, its influence waspractically negligible except as a subject ofdebate. Some American business leaderslook upon it as a boom to our industries,because of the extensive purchasing of ourproducts which it should occasion. Othersconsider it the forerunner of financial de-pression here, pointing out the effect of theChicago fire in 1871 upon the Panic of 1873,and the San Francisco earthquake of 1906on the Panic of 1907. Both views are ex-treme, and the truth lies somewhere be-tween them. Prosperity is not created bywrecking cities, or the recent War wouldhave created unparalleled prosperity formany years, instead of the irregular andfrequently oppressive results now seenthroughout Europe. On the other hand, fewlosses by American insurance companiesare looked for, and in consequence littlefinancial liquidation here. The principalloser will be Japan herself. More issues ofJapanese securities in the near future arenot unlikely. Meanwhile, a genuine curtail-ment in Japanese naval and military pro-grams wil l be inevitab le , if Japan ’seconomic recovery is to be swift."


56

The logic applied by Time magazine wasquite clear-cut. The Japanese earthquakedid not involve any direct loss to the U.S. sothe doom and gloom boys, who appear tohave been seeing gloom in just about every-thing, were stretching things a bit too far.Nonetheless, with the added advantage ofhindsight, Japanese investment in the U.S.markets was withdrawn by the sheer de-mand of capital in the homeland. This nodoubt had a short-term effect of sellingpressure in the equities which was notedduring September. Yet the U.S. productionseemed to benefit in the fall and corporateprofits continued to rise.

The trade perspective with Japan hadchanged. Imports from Japan to the U.S.peaked at $354 million in 1922 and declinedto $347 million in 1923, followed by a dropto $340 million in 1924. This amounted toa 4% decline from the U.S. perspectivewhile exports to Japan rose from $222 to$253 million during the same correspond-ing period, which was a gain of 13.9%.

Therefore in the end, the U.S. industrybenefited and the ill omen of previous dis-asters failed to materialize.

On October 1, 1923, Time magazine madethis comment as the stock market contin-ued to decline into early October: "As theFall season develops, there is evidence thatthe declining stock market last Spring fore-cast general conditions in trade with someaccuracy. A more conservative attitudeprevails in mercantile circles; some disap-pointment is being expressed by previousoptimists concerning the Autumn outlook."

Everyone continued to keep a watchfuleye upon the stock market - more so thanupon the production numbers and corpo-rate profits. Although fundamentally busi-ness was st ill doing well, the fear ofdepression and collapse still lived on in theminds of the analysts. Auto sales for thefirst eight months in 1923 exceeded the en-tire year’s sales during both 1921 and 1922.This was a clear sign that the consumer wasnot backing off and although rates re-

US IMPORTS FROM JAPAN


$ m

illio

ns

YEARLY: 1900-1940

1900 1907 1914 1921 1928 1935

450

400

350

300

250

200

150

100

50

0


57

mained firm due to consumer demand,money was easy to obtain. In the long run,the consumer proved to know more aboutthe market and the economic future thanthe professional analysts and speculatorswho tried to forecast the future by everynew tick in the market.

In the October 29, 1923 edition of Timemagazine this note was published:

"This status quo of business can often bedetermined by the prophecies of variousbusiness groups. Some manufacturers arestoutly insisting in public that the stock mar-ket no longer accurately discounts the fu-ture, while privately they are trimming theirsales for 1924. Most merchants, whose saleshave not yet started to decline, apparentlyforesee limitless prosperity ahead.

"A prophet of a different sort is LeonardP. Ayres of the Cleveland Trust Co., whosepredictions as to the trend of business havein recent years proved so accurate and cou-rageous that his remarks are always worth

listening to. H is mouthpiece, the fort-nightly bulletin of the Cleveland Trust, nowexpresses its opinion that 1924 will be a yearof diminished prosperity, and cites the ob-vious decline in output in iron and steel,automobiles, tires, cotton, wool, shoes andbuilding construction. It also declares thatshort-term interest charges are about tobegin a long decline. That in consequence,food prices should respond by commencinga gradual rise. The bulletin very sanely con-cludes: ‘here is good reason to believe at thepresent time we are not headed for anydrastic period of depression, but nearly allthe familiar indications point to a less activeyear in 1924 than that now drawing to aclose. It seems probable that general busi-ness will decline to levels lower than thepresent ones before it will again recover toany such pitch of activity as it reached lastspring.’"

The stock market was undoubtedlyviewed as an important indicator for thefuture. But just as the well-known analystsof those days throw in the towel on the very

DEUTSCHE MARK

U.S

. Dol

lar

per

Deu

tsch

e M

ark

MONTHLY: 1923


0.0021

0.002

0.0019

0.0018

0.0017

0.0016

0.0015

0.0014

0.0013

0.0012

0.0011

0.001

0.0009

0.0008

0.0007

0.0006

0.0005

0.0004

0.0003

0.0002

0.0001

0


58

low of the industrials that October of 1923,others were not quick to realize that some-thing was brewing. No one stepped back farenough to realize that the market was fol-lowing the dollar in the midst of a world ineconomic turmoil.

November saw a sharp rally in stockprices, which would eventually continue forfive months as the Dow rallied from theOctober low at slightly below 86 back abovethe 100 level, testing the 1923 Spring high.On November 5, 1923, Time magazine hadthese comments:

"Prophets of future tendencies in busi-ness, and particularly those practical seerswho attempt to cash their foreknowledge inthe stock market, have been considerablybewildered at the outlook during recentweeks. On the one hand, the ordinary signsof approaching depression, such as declin-ing iron production and falling stock pricesand interest rates are apparent to all. Onthe other hand, business leaders talk opti-mistically, merchandising is very heavy andprofitable, and railroads are getting somefat around their bones; worst of all, thestock market refuses to decline.

"The inconclusiveness of the stock markethas led some bankers and manufacturers todeclare that it is no longer a reliable ba-rometer to future business. The same opin-ion, incidentally, was frequently expressedduring the prophetic decline in prices whichoccurred in 1920.

"It may be, however, that the stock marketis now, as upon former occasions, a betterindex to the future than the post prandialdiscourse of many of its critics. The largelyfeatureless stock market of the past fewweeks may prove next Spring to have re-flected a period of duller but largely pain-less business conditions. But by that time,

the public who watch stock prices will bemore interested in their bearing upon theFall of 1924 than upon their forecastingaccuracy this Autumn.

"Money had been perceptibly easier. Or-dinarily this fact would possess consider-able significance as to next Spr ing’sbusiness. With our excessive gold supply,however, it is safe to assume only that de-clining interest rates should mean risingbond prices."

The market began to rally after a brief butsharp panic sell off after the rally in August.As we can see from the previous commen-tary of November 5, 1923, the pessimismpersisted. The majority remained con-vinced that the market was a leading indi-cator and that interest rates simply had todecline. But at last, some clear points wererevealed, which through hindsight illus-trated the true trend of the economy whichwould set the tone into 1929. The marketbegan to rally that November. Time maga-zine reported in the November 12, 1923edition as follows:

"The center of the American businessstage has been almost monopolized by thestock market during the past week. Tendays ago share prices were distinctly weak;of the speculative ‘leaders,’ Can declinedl/4 in a day, Baldwin 7/8, Studebaker 7/8,Steel 1 1/8. Even the reliable chain storessold off sharply. Stuart Warner dropped3 3/4.

"Then came the turn. Late one afternoon,U.S. Steel revealed a fine quarterly state-ment, declared an extra dividend of 1/4.Next morning, by curious coincidence - if itwas a coincidence - the redoubtable JesseL. Livermore announced, apropos of noth-ing in particular, that he had turned bullish,that with agricultural recovery and a Euro-


59

pean settlement near at hand profits lay onthe buying side, and that next year shouldbe prosperous without becoming a boom.Stock prices soared. Can rose 5 5/8 thatday, Baldwin 5 1/2, Studebaker 5 5/8, Steel5 1/8, with lesser advances throughout thelist even among the rails. Sales on the StockExchange passed the million mark each daythe rest of the week and prices continued toadvance, fractionally but steadily."

"These optimistic events at once split WallStreet into two schools of thought. Onedeclared its belief that the turn had comeand that pessimistic predictions regarding1924 had been overdone. The other, bear-ish to begin with, continued in that frame ofmind; it viewed with cynical suspicion theremarkable coincidence of the extra Steeldividend, Judge Gary’s colorful prophecies,broker Livermore’s equally colorful an-nouncement, the upward rush in the priceof the four present leading speculativestocks."

"When it came to explaining the motivebehind the alleged bull manipulation of thestock market, however, differences of opin-ion were expressed. Some were impressedwith the maneuver chiefly as a drive against‘short interest’ which was believed to belarge. Others pointed out that 1924 was aPresidential year, that the Party in powermight show more than verbal gratitude toanyone who could prevent depression andmaintain prosperity at least until after elec-tion day. A third school maintained thatlarge interests wished to stir up a good mar-ket in order to liquidate securities likely todecline further next year. All agreed, how-ever, that, if manipulation was responsible,it was no ‘piker’s game,’ that substantialfinancial interests had seriously committedthemselves to it."

"The test of all these wildly varied viewsshould come by the beginning of Decem-ber, when Congress meets, although thereason for the price advance may not beclear even to the initiated before nextSpring."

"The stock market, as is well known, usu-ally acts as a thermometer and barometerto general business conditions. The ques-tions now asked are: Is someone putting alighted match under the thermometerbulb? If so, who?"

This article in Time magazine illustratesseveral interesting points. Those who were"bearish to begin with" refused to allow themarket to guide their analysis. They werebent upon having a depression and chose toslander Livermore by suggesting that hemight gain some personal favors from thePresident if he could make the market goup. The excuses were, quite frankly, de-famatory and uncalled for.

In Germany during November 1923, theStresemann Cabinet was forced to resign inthe face of a vote of "no confidence." But,the new cabinet under Wilhelm Marx was

US TRADE BALANCEpercentage change

1901 1908 1915 1922 1929

2

1.8

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8


60

finally able to bring currency stabilizationin December, which helped restore confi-dence even in terms of the U.S. market.The collapse of the mark to 4.5 trillion tothe U.S. dollar in November was indeed ahistoric case of hyperinflation. But theworst was essentially over even though thedollar would continue its rise into January1924.

Through an international perspective andviewing the import/export numbers, it is notdifficult to see why the stock market hadsupported during 1923. Its bottom was notcreated by manipulation for, indeed, itwould have taken a lot more than a groupof men to halt a decline as evidenced byevery preceding panic. With foreign ex-change in turmoil and devaluations of un-precedented order in Europe, it would havebeen an unwise foreign investor who wasnot drawn to the dollar during this period.

The American analysts clung to theirtheories that declining interest rates were asign of declining demand for capital and, as

such, a warning of recession or depression.Indeed, this theory had always worked be-fore. The stock market had risen withhigher rates as expansion led to higher de-mand for capital. The fear of inflation waslargely due to government intervention asthat which took place in 1920. But the ana-lytical world failed to realize that interestrates may have declined because of the ex-cess capital which was flowing into the U.S.in flight from European currencies. Assuch, they analyzed the market solely froma domest ic perspect ive and failed tobroaden their minds to conceive of the in-ternational concerns among capital.

Total U.S. Balance of Trade

in m

illio

ns o

f dol

lars

in millions of dollars

1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933

$5,000

$4,000

$3,000

$2,000

$1,000

$0


61


Chapter IV

1924

The year 1924 began with the dollar con-tinuing its rally into January. The British

pound had continued to fall from its Febru-ary 1923 high of $4.70 to its January 1924low of $4.27. The French franc had fallenfrom its April 1923 high of 14.74 francs perdollar to 21.52 in January 1924. But theFrench franc continued lower against thedollar moving into February 1924, droppingto 23.58 to the dollar. This would eventu-ally prove to be the high on the dollar until1926.

The Swiss franc had proven to be the moststable of the European currencies. Buthere too, this currency dropped from its1923 equivalent high in U.S. terms of 18.78cents to 17.29 cents in January 1924. Thiswould prove to be the low for the Swiss

during 1924. The actual peak on the Swissagainst the dollar had taken place duringFebruary 1922 at 19.6 cents and had steadilydeclined into the January 1924 low. Fromhere, the Swiss would rally back to the 19.4cent level but the 1922 high would not bepenetrated during the balance of this dec-ade.

The Dow Jones Industrials continuedtheir rally which had begun from the Octo-ber 1923 low amidst the bitter rumors whichcontinued to fester over a proposed rela-tionship between Livermore and the cur-rent administration. The railroads had alsocontinued to rally into January along withthe bonds. It was clearly a broad marketrally and no one group could have possiblycontrolled enough capital to manipulate it.

BRITISH POUND

U.S

. Dol

lar

per

Pou

nd

Yearly: 1900-1930

1900 1905 1910 1915 1920 1925 1930

5.1

5

4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3


62

Indeed it would have been no "piker’sgame."

As it is today, people who are consistentlywrong, or even temporarily wrong, make uprumors and stories against anyone who hasbeen consistently right. Rumors normallyrun from, "Oh, he went bankrupt manyyears ago," implying that he will be wrongsomeday soon, to "I heard he was a crook soyou shouldn’t listen to him anyway" or "hehas powerful friends and they are forcingthe market to do what it would not do oth-erwise." These are all excuses put forth bythe losers.

Jesse Livermore was one person who hadbeen consistently correct about the market.The fact that Livermore was proved correctand that 1924 led to prosperity, "but notnecessarily a boom," stands as witness tosuch accusations. In the years ahead, thosewho were the losers grew to hate Liver-more, and instead of going with the trendmany would fight it just to try to prove himwrong.

For those who were bearish and contin-ued to fight the market all the way, the merefact that U.S. Steel declared an extra divi-dend, based on the reality that earningswere rising, didn’t matter. They remainedconvinced that lower interest rates indi-cated that a depression was due. It is amaz-ing how differently we view the stockmarket today in relation to interest rates ascompared to the bull market of the 1920s.

Technically, we can see that the Augustrally exceeded and even closed above the1923 Downtrend Line. Although Septem-ber fell back below the Downtrend Line,the market rallied back above it in Octoberand was now ripe for an upmove. Techni-cally there was clearly a lack of follow-through to the downside. Looking at theUptrend Line on the yearly Chart takenfrom joining the 1921 and 1922 low, we cansee that the 90 level was quite important.Although October 1923 exceeded the 90level, it fell back for the monthly close.November ran up and exceeded the Up-trend Line and closed above it. Althoughthe Industrials had not exceeded the 1919


63

high, they were clearly in a technical posi-tion to try one more time.

We can see from the yearly chart providedfor 1924 that the market continued higherinto early February and then once againcorrected for a three-month reaction intoMay of that year. The early summerbrought a substantial rally in the stock mar-ket and by August the market closed above105 on a monthly basis. After a two-monthsideways pattern going into the Presidentialelections of that year, the Industrials soaredas December ended and closed above 120at record highs.

1924 brought many signs of relief, andLivermore’s gut feelings proved to be cor-rect. Germany issued the new Reichemark,which was exchanged for 1 billion old marksand was backed by 30% gold. In the UnitedStates, corporate expansion continued but,more importantly, new companies were be-ing formed. IBM had its beginnings in 1924along with MGM, Columbia Pictures, DeanWitter & Co., and Massachusetts Investors

Trust; Kleenex was introduced and so wasthe first Chrysler.

There were still great arguments for bothpessimism and optimism. In January 1924,the New York Times listed the issues forboth sides but drew no conclusions. Theywere published as follows:

"The Grounds For Hopefulness 1) Our Impregnable gold, credit and

banking position. 2) Large recent profits in industry. 3) Recent record freight traffic and signs

of its likely continuance. 4) A conservative and economical admini-

stration in Washington. 5) Economic recovery in Europe, clearly

beginning despite Germany and Russia.

The Case for the Pessimist 1) Potential of credit inflation due to our

abnormal gold reserves. 2) Uncertainty as to the continuance of

large industrial profits, as seen in decliningcommodity prices, the steel industry, etc.


64

3) Probability of attack, and its possibilityof success, by radical Congressmen uponthe Transportation Act. 4) Unsettling influence of Presidential

election, bonus agitation, possible tamper-ing with Federal Reserve Act by farm bloc. 5) Germany drifting into bankruptcy,

England faced with a Labor Ministry,France feeling the results of debt inflation,reparations still unsettled."

During the period of the 1920s, the so-called knowledgeable investor and analystseemed to pounce upon every aspect ofeach issue and preferred to take the pessi-mist’s view. But the bull market of thisentire period was built upon the averageman who came into the market and paidcash. Contrary to many false beliefs aboutthis period, a number of the more leveragedspeculators lost money on the way up aswell as down.

The U.S. gold reserves had reached theirhighest point in history with nearly half theentire world’s official reserves held by theUnited States. Interest rates were easy,

money was easy, and there was no apprecia-ble sign of runaway inflation. Yet thesoundness of the banking system was ques-tioned; it would lead to inflation, pessimistsasserted. When it came to corporate prof-its, the pessimist admitted that they wererising and at a record pace. But how longcould this last? The U.S. would follow inGermany’s footsteps, they proclaimed.This type of attitude continued for manyyears because these were the very traderswho kept on shorting the market and whospread rumors about Livermore in an effortto discredit his accuracy and experience,both of which they lacked. Their principleshad been based upon a foregone conclusionpropelled by an unwarranted assumption.

Corporate profits were up on an averageof 30% along with dividends as the expand-ing American economy prompted manymembers of the general public to take stockin America. The railroads, after being hardhit in 1923, rallied sharply, still leading theindustrials on the way up. The prosperityand expansion continued as America be-came the leader in innovation.

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

ndMONTHLY: 1924


4.75

4.7

4.65

4.6

4.55

4.5

4.45

4.4

4.35

4.3

4.25


65

BRITISH POUND

U.S

. Dol

lar

per

Pou

nd

1919-1933

1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

5.2

5.1

5

4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3

3.2

3.1


66


67

The automobile industry consistently con-founded all conservative judgment. Yearafter year it apparently reached what thepessimists projected was its saturationpoint . Nonetheless, auto productionforged ahead to new record highs. The costof automobiles had actually declined by11% from 1913 to 1923. This was largelydue to the assembly line method of produc-tion.

In January 1924, U.S. Steel announcedanother extra dividend of 25 cents, and thevery favorable fourth quarter report for1923 displayed earnings of $49.9 million, upfrom $47.1 million in the third quarter.This meant that the normal dividend of 6%annually had risen to 7%. In 1922 the millswere operating at 75% capacity but as 1924began they were at 90% capacity.

As the market rallied from the fall of 1923into early February, Jesse Livermore beganto sell out his positions in favor of the shortside. In the February 25, 1924 edition of

Time magazine, the business and financesection carried this article:

"Mr.Jesse Livermore, young man withlight hair, big back head and solemn face,knows more about stocks and such thingsthan all others put together. So it is said.He sells or buys tens of thousands of sharesat a time and thousands follow when hesays, ’Buy’ or ’Sell.’

"Wall Street last week gave an exhibitionof mysteries second only to the oil scandalin Washington, and in fact caused by it. Thestock market had advanced steadily if ir-regularly for many weeks, and had becomeover-bought and top-heavy. At such times,any incident is enough to cause an upset.

"At this stage, enters Mr. Livermore, thenoted operator. His last two main prophe-cies on the stock market had been suffi-ciently fulfilled so that he had attractedconsiderable speculative following. Fromhis vantage point in Miami, he sent a state-ment to the press which was widely publish-ed, although the Wall Street Journal

DUTCH GUILDERU

.S.D

olla

r pe

r D

utch

Gui

lder

MONTHLY: 1924


0.405

0.4

0.395

0.39

0.385

0.38

0.375

0.37

0.365


68

refused to include it in its columns. Mr.Livermore declared that the oil scandal hadundermined confidence in the stock mar-ket, and rendered doubtful the presidentialnominations.’ I think it is very foolish tryingto be an optimist in the stock market at thepresent time,’ he added. The effect of hispronouncement on the stock prices waselectrical. In a single day, Fisher Body tell13 points, General Electric 8 1/2, Du Pont7 1/2, Baldwin 6, American Can 5, NationalLead 8, Houston Oil 7 1/2, U.S.Steel 3 1/8,Studebaker 3 1/4; the entire list with hardlyan exception declined.

"Flattering as such results may haveproved to Mr.Livermore, the real cause ofthe sudden decline was undoubtedly the‘technical position’ of the market. After all,Mr. Livermore is a better Judge of the stockmarket than of national affairs. This wasshown when he advocated more business-men in our government, only to meet Sena-tor Lenroot’s retort that there had beenseveral prominent business men rather toomuch mixed up in government affairslately."

Livermore had been proven correct notonly about the market but about the econ-omy as well. Nonetheless, few people likesomeone who is more correct than incor-rect, particularly when money is at stake.Not only did the Wall Street Journal refuseto even mention the accuracy of his predic-tions in light of their own views, but manygrew to fester a hatred toward the man.Perhaps it was human nature to blame ma-nipulation on Livermore rather than admitone’s own error; nonetheless, this attitudecould continue to the point that his own lifewould be threatened because of his accu-racy.

Even today, the vast majority of peoplewho trade the stock market rely totally upon

fundamental analysis. The greatest of allproblems lies in the fact that fundamentalschange so quickly, and that the very samefundamental is often used by both the pes-simist and the optimist in their argumentsto support their positions.

As the stock market bottomed in 1923, theheight of pessimism existed. Rather thanbelieve that the corporate strength withinthe economy was still moving along, indi-cating that the decline in the market wasmerely a consolidation phase, the majoritychose the position that held true to theirconviction that the stock market was a lead-ing indicator, and that in itself suggested atime would come when corporate earningswould eventually drop.

With hindsight we can see clearly that thatposition was incorrect. There were manyvarious fundamentals that were obviouslyoverlooked by most analysts at that time.Foreign trade during 1923 averaged more


69

than $26.5 million for each working day.Exports were $13.8 million and imports av-eraged $12.6 million per working day. Al-most two-thirds of the exports were in themanufacturing sector while the importswere primarily raw materials used in pro-duction. As 1924 began, January importswere valued at $299 million against exportswhich were valued at $394 million for themonth.

In addition to the positive productionposture of that time, the U.S. had becomea creditor nation instead of a debtor nation.This did lead to serious criticism and manycomplaints. The complaints came largelyfrom Argentina and Japan who claimedthat the U.S. was forcing them to pay exor-bitant interest rates. Of course, much wasdue to political reasons on the part of theparty which was currently out of favor criti-cizing the party in favor. The truth of thematter was that foreign nations who came

to the New York market had to compete formoney against the steady demand for do-mestic money on the part of business andinvestment, which stood at several billion atthat time. Therefore, to entice investors topurchase their foreign bonds, it was onlynatural that they would offer much higherrates of interest in order to attract willinglenders. This was one reason why the Fed-eral Reserve maintained the discount rateat 4.5%, which was sharply higher than callmoney rates.

Inflation was a concern as a result of therising gold reserves, which stood at recordlevels. This was being caused by two fac-tors. First, a strong trade surplus and sec-ond, a definitive fight in internationalcapital to the U.S. as political and financialstability throughout Europe remained inserious question. Nonetheless, the cost ofliving had dropped during January by .2%.From the peak in inflation, July 1920, toJanuary 1924 the actual cost of living haddeclined by 19.5% despite the rise in thegold reserves.

Time magazine reflected the sentimentin their March 10, 1924 issue by comment-ing on all the positive annual statementsthat had been pouring out for 1923 in nearlyevery sector. They stated: "It is, however,always important to remember that by thistime annual statements for 1923 are practi-cally ancient h istory. They indicatewhether the given company has a strong orweak cash position, but they give little hintas to the present operations or future out-look. While sentiment is divided betweenoptimism and pessimism, the perusal ofthese statements is valuable in gaining per-spective; they cannot and do not furnishmuch of a basis for future predictions."

The pessimism that underscored the presscommentary during March of 1924 was


70

quite amazing. Here the stock market hadjust rallied sharply, peaking during earlyFebruary. Only one month of lower trend-ing prices and everyone was right back tothe good old doom and gloom scenarios,ignoring fantastic corporate earnings whichshould have been the basis for a solid bullmarket in the first place. They also ignoredthe fact that gold was still flowing into theStates and that most of it was due to a flightof capital in favor of the U.S. economywhich reigned supreme in the world at thattime. The downtrend continued from Feb-ruary 1924 into May of that year. The for-eign situation was beginning to turn duringlate February. Several new governmentshad been set up by the Treaty of Versaillesand those that had been seriously batteredby hyperinflation were returning to the goldstandard.

France established a gold franc that wasequal to 19.3 U.S. cents. However, 20 goldfrancs contained .1867 troy ounces of gold.Nonetheless, France did not mint any goldcoins for general circulation between 1915

and 1929. Austria, with the help of Britain,discarded the krone in favor of the newschilling, which was based upon silver. Thenew retenmark of Germany was equal to23.8 U.S. cents and based upon gold. EvenRussia, after realizing that its rubles wereworthless, issued in 1923 the new "cher-vonetz," which was equal to 10 gold rublesor $5.15. Hungary was forced to abandonthe old krone in favor of the new "spark-rone." The European trend was not neces-sarily to redeem its old currencies, butinstead it practically repudiated them bycreating new currencies based upon gold.

The February 1923 high in the Dow hadcorresponded precisely with a high in thedollar on world exchange markets. AsEurope regrouped, cash flow into the Statesbegan to subside and so did the buying pres-sure from overseas. Analysts, however,continued to view the market solely from adomestic perspective, giving no recognitionto the fact that perhaps America had a mo-nopoly upon economic stability at that time.

FRENCH FRANCF

renc

h F

ranc

per

U.S

. Dol

lar

Yearly: 1900-1930

1900 1905 1910 1915 1920 1925 1930

45

40

35

30

25

20

15

10

5

0


71

Nevertheless, as the stock market contin-ued lower, gloom became fashionable onceagain. In the April 21, 1924 issue of Timemagazine the opening statement under thebusiness and finance section had this to sayabout the current atmosphere: "Amid thebabel of conflicting opinions during thepast week, on the future probabilities inbusiness, one strong and uncompromisingattitude became conspicuous. This was thebearishnsss of Wall Street."

The analysts, who preferred to choose thebearish side as usual, were pointing out thatalthough the stock market had ralliedsharply from the fall of 1923 into early 1924,many stocks remained at their lows. It wastrue, in fact, that many stocks did not par-ticipate in the sharp rally. Industries suchas leather rubber, shipping and fertilizershad hardly moved since the February high,and neither had the automobile stocks orsteel and tobacco. Others pointed out thatthe railroads had held up rather strongly.

The analysts were much too busy trying tofind stocks that did not participate in the

rally to justify why the market would con-tinue lower, rather than explaining honestlywhy some sectors had risen sharply. Thereal reason why the rally from the 1923 lowinto the early 1924 high was not a broadmarket rally is twofold.

First, call money had remained under thediscount rate and time deposits were paying2% at best. Most foreign bond issues wereforced to pay 6% to 8% in order to attractlenders. But many small investors who en-tered the market on full cash positions andnot margin were attracted to issues whichwere paying an annual dividend of 5% orbetter. U.S. Steel is only one example. Thespeculators were interested primarily inprice fluctuations while the capital inves-tors were interested in return. With tur-moil in Europe on the front pages duringthe last quarter of 1923, it was not hard tofigure out, given a choice between a foreignbond paying 6% and U.S. Steel, which ofthe two was the safer capital investment.

The second reason why the rally into early1924 was a selected rally lies primarily in

FRENCH FRANCU

.S.D

olla

r pe

r F

renc

h F

ranc

MONTHLY: 1924


0.066

0.064

0.062

0.06

0.058

0.056

0.054

0.052

0.05

0.048

0.046

0.044

0.042


72

the realm of foreign exchange. Foreign in-vestors were also attracted by the betterperforming companies with the best divi-dends. As the dollar continued its rise, thegold reserves continued to expand to recordlevels. The trade balance between the U.S.and Europe continued to move in favor ofthe U.S., reflecting a strong export econ-omy which aided the rise in the gold re-serves. However, the gold reserves greweven sharper than the exports which re-flected that a net capital flow to the U.S. ona cash basis was also taking place. This wasnot in payment for goods but capital fleeinginto the dollar.

Therefore, it clearly seems plausible thatthe only people who didn’t know why themarket had risen during that period whenthe dollar rallied sharply were the profes-sionals.

The small U.S. investor’s motives weredividends and concern over foreign bonds.The international investor focused on thesafety of the dollar and the profits broughtthrough foreign exchange. Both forces

combined to make the rally from the 1923low a rally which was selective largely focus-ing upon the blue chips. In many respectsthis was the very same type of rally whichwas witnessed from the September 1985low when the Dow Jones Industrials leadthe broad market to new highs all the way.

The real estate boom, which was largelytaking place in the East, was becoming alittle uncertain at this point in time. Com-mentary again found Realtors expressingtheir fears that the boom was now at an end.Commodity prices continued to fall fromDecember 1923. Yet some commoditiessuch as livestock, oils and building materi-als, were advancing. Nonetheless, steelproduction was establishing all-time newrecords. Output for March had reached 4.1million tons compared to 3.7 million tonsduring the previous month, 3.6 million tonsin January 1924, and 4 million tons duringMarch 1923.

The fears that were circulating werelargely based upon anticipation rather thanon hard-core facts. Most became skeptical

SWISS FRANCU

.S.D

olla

r pe

r S

wis

s F

ranc

MONTHLY: 1924


0.196

0.194

0.192

0.19

0.188

0.186

0.184

0.182

0.18

0.178

0.176

0.174

0.172


73

about the future of business conditionsevery time the stock market began a downtick. But the building boom was still intacteven during March. Building expendituresduring March 1924 were $318 million com-pared with $248 million in February, $189million in January and $292 million duringMarch 1923.

The Federal Trade Commission was alsoactive during those days. They sent forth adirective to Eastman Kodak and associatedfirms that stated in no uncertain terms thatthey must cease from restraining competi-tion in the manufacture and sale of motionpicture film. It specifically singled out andbarred Kodak from acquiring control ofthree additional laboratories. The Com-mission reported that Kodak had essen-tially a monopoly on the manufacture ofpositive film and a complete monopoly onnegative film.

The sentiment hadn’t changed, and asApril continued to click on by, the April 28commentary in Time Magazine was stillquite gloomy: "Nothing is quite so easy todo, or so unfair in the doing, as throwingmud at former prophecies that haven’tpanned out. Hindsight, now as previously,is much simpler than foresight. All thesame, there was heard last week consider-able criticism of the bankers and industrialleaders who last fall predicted great pros-perity this spring. The spring has come, butprofits in most lines of industry are gettingleaner each week; in some industries theyhave disappeared."

April began to see somewhat of a declinein production and this prompted everyoneto proclaim that the stock market peak inFebruary had foretold of this disaster. Thedeclines were actually hardly worth noting,yet the press focused upon the disasterswhich were still centered within the leather,textile and fertilizer sectors. Time re-ported: "It is the basic ‘assumption’ now fora quiet summer and only a bit of a rally inthe fall provided Coolidge is reelected."

It was during May 1924 that John May-nard Keynes’ book hit the streets selling for$2.50. Perhaps no one realized at that time


74

just how much difference that $2.50 wouldmake in the future events of Western civili-zation. His book was revolved by Time onMay 12, 1924 under the title of "MonetaryReform." Time commented on the book asfollows:

"Mr. Keynes, famed British economist, hasnever before emphasized so clearly the factthat he is a fiscal Bolshevik.

"Monetary Reform analyses the functionof money, shows how it affects the investingand business classes, the earner, produc-tion. It discusses inflation and its relationto taxation and capital levy. It delves intothe whole theory of money and the foreignexchanges. It suggests alternative aims inmonetary policy and then advocates infla-tion, neatly garbed.

"Mr. Keynes wants a devaluation of cur-rency, which means stabilization of moneyat present values. He wants internal pur-chasing power fixed on a commodity-valuebasis related to unemployment, state oftrade, etc., while the external purchasingpower shall be controlled by gold whenevernecessary.

"Those readers who have followed Mr.Keynes’ recent course will not be surprisedat this attack on the present fiscal policiesof most countries. Mr. Keynes would havethe world embark upon great experiments.He apparently imagines that the clarity ofhis expression stimulates not the imagina-tion but the common-sense of men. Hiscontentions are a subversion of establishedfiscal policies in use for more than 100years, a period in which, as Mr. Keynesagrees, the gold standard of currency be-came the unquestioned foundation of ‘thestability and safety of a money contract.’ Itis inconceivable that rapid progressivism

should be regarded favorably in the conser-vative world of money.

"The author is fortunately being ignored,because every country in the world is seek-ing to claim parity with the dollar and to fixits internal values to the gold value of itscurrency or in other words, to deflate. Fur-thermore, if the signs of the times be readaright, the Federal Reserve Bank has al-ready adopted a policy of discounting Euro-pean notes in large amounts, which is apolicy more calculated to assist the recov-ery of European currencies than any yetoperated."

Time’s unfavorable commentary upon thepublication of the Keynesian theory, whichis so widely employed today, provides agood insight into the general attitudeswhich prevailed. Those who have attrib-uted the great bull market of the 1920s toirresponsible speculation that swept the na-tion should go back and read a bit furtherbeyond 1929. If anything, the one consis-tent undertone that prevailed was one ofdisbelief and conservatism. On the slight-est down tick, pessimism soared. Perhapsrightfully so, considering the number ofpanics that had taken place during the pre-vious 20 year period.

Nonetheless, as the market continuedlower into May, industrial production didhave a fairly sharp correction in a veryabrupt fashion. Steel production, whichhad been at 90% capacity, fell to 60% ca-pacity in May. Yet there were some strangesigns which counteracted against the de-clining stock market and sharp correctionin the industrial production. Money wasvery abundant and very cheap. As the stockmarket bottomed, commentary in the pressby early June compared the stock market toa motionless sphinx which had entered a


75

Sargasso sea where ships became entangledin a bed of seaweed.

The economy had indeed come to a pausein its robust fervor for expansion. In part,this was created by the sharp rise in thedollar. Exports to Europe had slackenedduring the first quarter in response to thehigh in the dollar and the adjustment periodfollowing the collapse of Germany.

One aspect of the foreign war debt owedto the United States had begun to rear itshorns and it eventually became a leadingelement thrusting the U.S. into a debtornation position decades into the future.The total war debt owed to the U.S. fromWorld War I was roughly $11 billion. WhileEurope haggled with reparations demand-ing $33 billion in payment from Germany,the British and the French launched propa-ganda toward the U.S. and indeed within itsown borders to forgive its war debts. By thistime, the U.S. had already granted conces-sions to the European governments forgiv-ing a portion of their debt. The British weregiven a concession of 30%, the French 40%,

the Italians 70% and the Belgians approxi-mately 60%.

One aspect of the war debts had a largepart in creating the Great Depression(which eventually led to Keynes’ "Bolshe-vik" policies being embraced out of sheerdesperation), and this lay solely in the inter-est impact to the United States. By 1929,only $250 million in payments would bemade by Europe on its war debt to theUnited States. That same correspondingperiod cost the U.S. government $450 mil-lion in interest to float that loan through itsown bonds.

This effect would be a subtle yet distinctfactor which would remain hidden in theeconomic statistics for many years. The re-luctance of Europe to pay its debt then andafter World War II added a fair portion tothe U.S. national debt, which to this day isstill being carried at interest costs in thehundreds of billions in 1985. Eventually in1933, France repudiated its debt on thepremise that it could not afford to pay its$60 million annually. The truth of the mat-


76

ter is that France at that very moment had$500 million on deposit in New York Cityfrom a surplus on international exchange.

The foreign trade picture began to turnequally as fast as the dollar’s retreat fromits January-February 1924 high. The Brit-ish pound rose from its January low of $4.27to $4.38 by March. By July this trend con-tinued as the dollar retreated and the poundrose to $4.57. By year end, the poundclosed 1924 at $4.73 near the pre-war parlevel. 1924 began a sharp upturn in U.S.exports to Europe and the trade surplusgrew sharply, rising 44% above the 1923surplus. This trend began to shape the fu-ture in April although the market wouldcontinue lower into May.

Technically, the market had corrected intoa May low. The 1924 Downtrend Line (con-necting the February and March highs) hadcontained the rallies during April and May.During early June, the market had begun torally and once the 1924 Downtrend Linewas exceeded. The market fell back andtested it once on a weekly basis and never

looked back again. By August the marketrallied to slightly above the 105 level, tryingfor the second time to penetrate the 1923high and the major high of 1919. As I havediscussed at our technical seminars over theyears, the more a market tests the samearea, the more likely it will be for penetra-tion and eventual follow-through.

On June 9, the press admitted that per-haps the business conditions were not goingto collapse entirely. Most commentedupon the fact that money was easy and thatthe outlook indicated that it would continueto remain so.

The banking business began at this timeto take on a new style or image. Prior tomid-1924, banks regarded advertising asundignified. Yet all sorts of advertisementsbegan to appear in the papers. Steady andaggressive campaigns were launched as ascramble to become a billion dollar bankbecame the main battle cry. Up to thistime, only the American Bank had sur-passed that lofty goal. This change in thebanking attitude also played an important


77

role in the mental attitude that would helpcreate the biggest bull market in history.Numerous major corporations had beenformed and the public was bombarded bynew and exciting events. Banks were ag-gressively competing for business, whichtended to increase the perception of justhow sound the underlying structure actuallywas at that time.

Interest rates were falling drastically. Bymid-June, call money rates fell below 3%,setting a new record low; by June 20, callmoney fell to 2%, which was a six year low.The Federal Reserve followed suit and thediscount rate was lowered from 4.5% to3.5%. The stock market began to rally. To-day such a rally would at once be attributedto a decline in rates thereby affording morecapital for speculation. But once again itcoincided with a rise in capital flow in favorof the U.S. created largely by the dramati-cally rising trade surplus. The discount ratecut came after the market had already bot-tomed and the gold reserves were growingabnormally once again.

Everyone was waiting for Livermore, whoback in February proclaimed his bearish-ness and was once again right on target.The press called upon him to see if he wouldgive the market his blessing but he re-mained unchanged. However, he gave hisreasons which were widely published. Hebasically stated that he felt that it takes a lotmore than simply cheap money to make abull market and he pointed out quite cor-rectly that all the recent rallies in the stockmarket had taken place during rising peri-ods when interest rates were substantiallyhigher or during sustained periods of higherrates. Most of the press ended their articlesmuch more favorably than in the past. Forexample, one article ended by adding: "Theimportance attached to Mr. Livermore’sopinion in Wall Street and elsewhere is dueto the large number of times he has beencorrect."

During this period there was actually anoil crisis taking place simultaneously withthe stock market low. In 1923, there was anunexpectedly large oil production. Mostcompanies had stockpiled crude becauseprices had dropped sharply when auto pro-duction fell to some degree. However, inthose days, oil consumption dependedgreatly upon the weather, not for heating oilconsiderations, but for gasoline consump-tion. The winter of 1924 was exceptionallycold and the spring was wet. The automo-bile was largely a novelty and used primarilyfor excursions and this put a damper on theAmerican motor ing public’s act ivit ieswhich included joy rides into the country forrelaxation. If weather was bad, gasolineconsumption fell.

But during the spring of 1924, the oilcompanies raised the price of crude, bring-ing out the wildcatters once again. Thissparked further production and gasolinestockpiles rose tremendously, setting a re-


78


in m

illio

ns o

f dol

lars


1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933

$5,000

$4,000

$3,000

$2,000

$1,000

$0


79

PASSENGER CARSm

illio

ns

Yearly: 1918-1929

1918 1925

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0


Rat

e of

Inte

rest

in %

1924

J

3.5

3

2.5

2

1.5

1

0.5

0


80

cord high at the end of April of 1.6 billiongallons. Gasoline prices started to dropand undercutting took place in the Midwestas well as on the East Coast. The oil stocksbecame hard hit going into early June.

Up to 1924, the interest rates in theUnited States had, by and large, beenhigher. But after the Fed lowered the dis-count rate to 3.5% in June 1924, the U.S.emerged as the lowest interest rate market.This was interpreted much differently atthat time than we would interpret such anevent today. Time magazine put it very wellon June 30 in their comments as follows:

"Usually London, as the former financialcenter of the world, has been able to main-tain the lowest money rates, while NewYork rates have ruled far above."

In those days, the higher the rate of inter-est a nation paid, the less of a credit ratingit maintained within the international com-munity. Money was pouring into theUnited States as nervous Europeans lookedupon America as the land with streetspaved in gold. Industry was expanding, in-novation was abundant, and from their eyesthe U.S. was the place to be. As foreigncapital flooded into the United States, theinterest rates continued to drop to the pointwhere call money rates reached 2%.

In 1924, foreign capital was pouring intothe U.S. while the discount rate had beendeclining steadily since 1920. Around theworld the official discount rates stood at theend of June 1924 as follows:

Austria................... 12.0%Belgium....................5.5%Bulgaria....................7.0%Czechoslovakia........6.0%Denmark..................7.0%England....................4.0%

France.......................6.0%Germany.................10.0%Greece......................7.5%Hungary..................18.5%India..........................7.0%Italy...........................5.5%Japan........................ 8.0%Holland.................... 5.0%Norway..................... 7.0%Poland.................... 12.0%Portugal....................9.0%Rumania...................6.0%South Africa............ 6.0%Spain.........................5.0%Sweden.....................5.5%Switzerland..............4.0%United States..........3.5%

The stock market began to rise sharply bythe end of June and during July the upwardtrend continued. By and large, everyoneremained confused and began to suggestthat the rally was due to the decline in in-terest rates. But the true cause was theinflux of a 44% rise in the U.S. trade sur-plus.

In the July 7, 1924 edition of Time maga-zine, this attitude was expressed: "WallStreet, however, after several months of anuninteresting experience with meanin-glessly see-sawing prices, is now getting theold-fashioned thrill that only a sudden de-cline in interest rates can give. Bonds andstocks with fixed or certain dividends aremaking new highs daily. Yet, on the basisthat it takes something more than cheapmoney to produce rising markets and pros-perity, investors are still gun-shy of indus-trial stocks for the most part. The GreatGod Livermore has yet to declare himselfconvinced that the turn in the Industrialshas come. But it is too much to believe thatthe speculative leader is unaware of thesoaring investment markets, or that he hasnot profited somewhat thereby."


81

What was taking place was still the twofold play. First, foreign investment seekingdollar safety entered the market looking forhigher dividend paying stocks. Many indus-trials were still paying a 4% to 7% dividendand with call money at 2%, they were look-ing at a hard-core fixed profit. This divi-dend play in the face of cheap money alsoattracted the small investor ahead of theso-called knowledgeable investor. Whatonly hindsight would reveal was the hiddentruth that the schlep on the street some-times knows more than the man in the backseat of the limousine.

Although money was cheap, it hadn’t yetbroken all-time record lows which had beenestablished at 1.55 back in 1894. Yet the 2%level matched the low which had been es-tablished prior to World War I during June1914. Speculation then began to circulatethat the Fed was going to cut the discountrate again to 3% and the buying fever con-tinued, reaching a high during mid-Augustof 1924 before any setback would come.

Nonetheless, just in the midst of the earlyweeks of August before the high came intoplay, U.S. Steel once again announced asurprise extra dividend, but this time anextra 1/2 point or 50 cents. Although theearnings of U.S. Steel did decline from $50million during the first quarter of 1924, thesecond quarter was still $41.3 million. Thismeant that U.S. Steel earnings for the firsthalf of 1924 were $8.47 per share which wasstill another record.

Most analysts today perceive lower ratesof interest as bullish and higher as bearish.Some would point to this June discount ratecut and assert that it was the fundamentalreason why the market rallied. But thiswould be proven incorrect in the monthsand years that followed. The importance of

this discount rate cut is that it was bullishonly because the call money rate and long-term rates were below the dividend yields.Therefore, just as we saw money marketfunds burst with cash and attract moneyfrom the stock market in the early 1980s, in1924 the stock market was paying morethan an interest-bearing account and assuch rallied as capital flow turned positive.Capital, even domestically, will flow to thehighest bidder and in 1924 it was the stockmarket.

Then it came. On Thursday, August 7, theFed cut the discount rate to 3% as moneysimply poured into the U.S. economy in theface of a continued expansion in the U.S.trade surplus. The rising stock market andthe impressive earnings on the part ofAmerica’s largest corporations lured manyforeign investors. But just as the newsbroke following the earnings and the dis-count rate cut, the market peaked. Afterclosing August above 105, the marketpulled back to eventually dip below 100moving into October, just prior to the Presi-dential elections.

The world had come under serious debtpressure due to World War I. The actualamount of gold in the world was far less thanthe outstanding debt which was owed to theUnited States and by mid-1924 the U.S.held more than half of the entire officialworld supply.

South African gold production was reach-ing a record level of 829,437 ounces in Julyof 1924 alone. Due to various laws in na-tions such as Britain, which prohibited theexportation of gold, and due to the pre-mium placed upon gold itself among thedebt ridden world, most of the South Afri-can new gold production was pouring intothe United States. As this continued,money in the U.S. remained easy and rela-


82

tively cheap. This created much confusionwithin the analytical sector which served formany as a misinterpreter of the economy.Everyone was used to lower rates duringrecessions but not during expansion.

Traditionally, it was held that declininginterest rates reflected a lower demand formoney and subsequently it was regarded asa sign of recession. But at the same time,interest rates which became too high wereseen as inflationary, robbing industry ofprofits. Therefore, it was consistent underthe current interpretation of interest rateswithin that atmosphere for Livermore topoint out that the stock market had risenpreviously on higher rates and not withlower rates. Subsequently, even the famousJesse Livermore became confused by thedeclining rate during the summer of 1924and he indeed missed the rally along withmost other professionals.

As the market came into its bottom priorto the Presidential elections, money re-mained easy but call money rates began torise for the first time that year. Call moneysuddenly rose from 2% to 2.5%. Gold im-ports began to ease off sharply as Indiabegan to attract the precious metals. Yetforeign loans were increasingly beingfloated in New York as the world cameknocking on the U.S. door for money. Thiswas one primary factor for the rise in thecall money rate during October 1924.

The winter and spring had already beenfairly cold and damp. When it came to thewheat harvest in the fall the rains continuedin Europe and became very destructive,forcing wheat up to $1.50 on the futures inChicago.

After the August high, the market tradeddown through a consolidation phase for twomonths coinciding precisely with the last

drop in the discount rate. But the consoli-dation had reached bottom, barely pene-trating below the 100 level during October.In the final throws of October, the marketrallied back and closed at 104. Suddenly,from the opening bell in November, tradersscrambled nearly buckling under the pres-sure of huge volume which had not beenseen since the pre-1920 years.

Then the stock market took off in one ofthe most straight up moves it had evermade. Immediately the press jumped onthe move, interviewing everyone trying tofind out what was really going on. The con-sensus narrowed the reasons down to three:1) The election of President Coolidge; 2)Coolidge’s lack of action against the rail-roads to restrain laws which would breakthem up; 3) Britain had come close to so-cialism yet in the nick of time veered awayand elected a Conservative government.These were the main occurrences reportedas the influencing force which encouragedthe masses to buy. Although these werelogical reasons to the experienced trader inan attempt to interpret the actions of theunsophisticated investor, again they missedthe important aspects which made sense tothe little guy. If U.S. Steel is paying 7% andthe bank 3%, you had to be crazy not to buyU.S. Steel. This led the common massesinto the stock market as never before in theface of declining income on time depositsat the banks.

Brokerage houses were reporting that pri-vate individuals who hadn’t invested in themarket since the war had suddenly decidedthat business conditions were sound. Therally was led by the rails with new highs forthe year being scored across the board.Volume soared to near record levels trading2 million shares a day.


83

It was in November that call money ratesfell back to 2% again but this time someforeign capital was leaving New York infavor of Europe. The "Expert’s Plan" hadbeen adopted and everyone turned theireyes toward Europe assuming that a robustrecovery was at last at hand. In anticipationof that, N.Y. banks began to lend overseasto various industries. The London stockmarket began to rally and sterling at lastbegan to firm, approaching the pre-warlevel coming close to par. By November allthe press had turned from doom and gloomand pronounced that the signs now pointedthe way to prosperity moving into the springof 1925.

Many infrequently traded stocks suddenlyappeared on the ticker tape. During theweek of November 10, 689 different stockstraded and in the ten post- election days18,717,732 shares had changed hands,which was a record since 1901. The totalappreciation in the value of the entire ex-change was nearly $3 billion with an aver-age advance of 5 points.

The ticker was twenty minutes behind andthe press announced that it was the "public’smarket." By early December the marketstill soared; advances were simply all overthe place. Time magazine had this to com-ment:

"The stock market has continued to provethe most active spot in business. Volumehas been continuing at about an average of2 million shares a day, with rising prices inboth rails and industrials. Liberty bonds,on the other hand, have been stationary orweak- another normal sign of a good sized‘bull market.’"

Again, the commentary at that time wasstrikingly different from what we would ex-pect today. Here, Time magazine clearlystates that declining bonds and rising stockswere the true sign of a good bull market. Aslong as interest rates are relatively higherthan dividends, the bias will be towardbonds. But if rates are under dividends, thebias swings toward the stock market. Thestrong rally into the end of 1924 was reflec-tive of capital leaving the bond market and


84

flooding into the equity markets. This is animportant insight which has been seriouslylost in recent years.

Another important insight into this mar-ket has been misinterpreted by many whohave written only about the Crash of 1929.The picture that has been painted is one inwhich the masses were recklessly over-mar-gined, borrowing everything they could tobuy stocks. We will take a look at thatperiod when it comes into play later during1928. However, the initial raging bull mar-ket which took off from the October low in1924 was strikingly different from whatmost of us would have expected.

Time magazine reported: "One remark-able feature of the recent market activityhas been the stationary status of broker’sloans. Usually, as stock prices rise, Inves-tors sell out to speculators who buy ‘onmargin,’ thus occasioning a rise in theamount of money borrowed by stockbro-kers at the banks. No official figures onbroker’s loans are kept, but fairly reliable

estimates indicate that recently no advancehas occurred in their amounts."

The stock market was rising not on mar-gined speculation but on solid investment.As reported by Time magazine in Decem-ber: "Public investment in real estate hasbeen on a decline." Cash was flowing fromboth the bond and real estate markets di-rectly into the stock market for full cashpurchases. This signaled not speculation,but massive investment due to rising confi-dence in the private industrial sector of theUnited States. The U.S. trade surplus withEurope would stand at a 44% gain over1923 by year end.

On December 15, 1924, Time Magazinereported as follows:

"On the Stock Exchange, heavy volumes intrading continue, along with a continuedalthough somewhat irregular advance inprices. As yet, no signs of security inflationhave appeared except in a minor way. Bro-ker’s loans are stationary and purchasing isstill largely for cash. Declarations of newdividends, especially among the weakerrailroads, already go to show that theautumn’s ‘bull market’ has not been amerely speculative movement, but causedby fundamental economic reasons.

"The real puzzle is with industrial securi-ties. They have appreciated along with therails, but more uncertainly and subject tolarger reactions. Moreover, securities ofdifferent industries have behaved quite dif-ferently. Industrial news continues to be-come more encouraging."

Indeed, the commentary during Decem-ber 1924 sounded universally bewilderedby the substantial appreciation in the indus-trials. Normally, the railroads had beenviewed as the bulwark within the overall


85

market. Railroads had been the rage of the1907 period but by the 1920s they hadgained a more conservative perspective.The industrials had now become the specu-lative issues. For example, during 1921 therailroads bottomed during June at the mid-65 level. The industrials continued lowerinto August reaching 64 on the Index. Therailroads rallied reaching 94 during Sep-tember 1922, whereas the industrials con-tinued to lag, eventually reaching 103 byDecember. The railroads therefore bot-tomed in advance and peaked in advance ofthe industrials. Even during 1923, when theindustrials reached their lowest point dur-ing October, the rails had already bottomedduring June and were in a moderate up-trend into year end. During early 1924, theindustrials fell from their February highinto the May low correcting by merely 14%while the rails traded sideways between 83and 80, which was less than a 4% correctionfrom a January high.

Between June and December 1924, therail rallied from 82 to 99 while the industri-als rallied from 89 to 121. The rails losttheir leadership and from this moment on,the Dow Jones Industrial Index would be-gin to assert a more prominent role. The"puzzle" with which the analytical world wasfaced was a loss of their leading indicator.

Eventually, this change in leadership be-tween the rails and the industrials was an-other milestone unto itself. It reflected thefundamental change in the perception ofthe American economy. At last Americahad entered the true industrial age whereinnovation, ingenuity and determinationwould change the course of history. In theyears to come, the industrials left the realmof speculative issues and entered into theworld of investments. Even in the yearsahead the slow death of the rails was noteasily foreseeable. Yet in 1932, the rails

had fallen 95% while the industrials haddeclined by 88%. Perhaps not that much ofa difference, but a subtle enough one thatpointed to the slow death through the dec-ades to come. The rails eventually evolvedinto today’s Transportation Index.

The big news hit in December. Goldstarted to flow out of the U.S. and back toEurope. The British pound, which hadreached $4.70 in February 1923, fell inJanuary 1924 to $4.27. The pound had con-tinued to rally and although still below par,which was $4.76 at that time, it had reached$4.73 in December of 1924. The Europeanrecovery was steaming along spurred on-ward by the loans extended to it by the NewYork banks. Suddenly, the outflow of goldfrom N.Y. caused many to buy even morestocks, proclaiming that fears of a gold in-flationary period were over.

Indeed, the gold exports were somethingto write about. In one day J.P. Morgan &Co. sent $5 million in gold coin to the Ger-man Reichsbank. Although this wasviewed as a means to stem potential infla-tion, the truth of the matter, when lookedat closely, revealed that even though thissingle shipment was greater than all thegold payments from the U.S. to Germany ina ten year period, it was still merely a pay-ment due them on account of their borrow-ings of $110 million. The gold exportsreceived headlines and were proclaimed asa sign that a gold inflationary wave was outof the question, but they were, in fact,merely gold loans to Europe.

Strangely enough, these very words of thepessimists were turned against them. Thosewho had continued to point to rising goldreserves and declining rates as a warning offuture depression gave rise to this burst ofinvestment as gold began to flow out of theStates. It did not matter that it was largely


86

due to loans. No one seems to have ana-lyzed such cash flows in a detailed posturein those days. The analysis was 100% do-mestically oriented. Yet, the other signsthat the pessimist used in his argumentswere drawn from the depressed state of theworld at large. Now with the so-called "Ex-ports Plan" to rebuild Europe, even thisfundamental turned against the pessimist.

Nonetheless, the fact that on a domesticlevel people were pouring their cash intothe stock market and not into real estate orbonds was not truly reflective of the bondofferings themselves. The following is a listof the bond offerings sold in the U.S. be-tween 1921 and 1924:

1921........ $2,145,406,1321922........ $1,675,131,5611923........ $1,608,595,7881924........ $2,127,823,688

Although cash was generally leaving thebond market, 1924 was still a record year forbond issues, nearly reaching the 1921 level.But there was a noted and distinct differ-ence in 1924 compared to the previousyears. The total sales of bonds this yearincluded state and municipals which hadnot been the case before. Prior years werelargely federal and corporate but in 1924the states began to borrow much moreheavily as well. Foreign capital had stillbeen absorbing much of the bond issuesduring this period, but with the recoveryboom in Europe, this began to slacken aswell. The biggest buyers of the bonds do-mestically were the banks and not the pub-lic.

As 1924 drew to an end, call money ratesjumped from 2% to 4% in one month.Granted, this may appear to be a suddenand sharp rise, but the stock market contin-ued higher and closed the year on the highabove 120 on the Dow Jones Industrials.

The disruption of the financial markets wascaused by a tremendous amount of pay-ments which came due from many places atonce. The British had to make a $68.5 mil-lion interest payment and a $23 millionprincipal payment on their war debt to theU.S. The final income tax payment for 1923was due in December at that time and theU.S. government 4% bonds were sold tosubscribers.

Even though the call money rate doubledin one month, at such times in the past it wasnot unheard of to see the rate swing nearlythree to four times during such periods.Therefore, the mere fact that the rate hadonly doubled was a bullish sign for the mar-ket and illustrated that the great AmericanFinancial System was sound and capable ofhandling huge transactions of record pro-portions. Therefore, in the face of doublingthe brokers loan rates in a single month, themarket pushed ever higher because salesare still largely for cash. Second, higherrates reflected higher demand and, as pre-viously stated, the analysis of that time wasbased on the awareness that depression anddeclining rates had always gone hand inhand.

US GOVERNMENT BOND YIELD


YEARLY: 1919-1929

1919 1926

6

5

4

3

2

1

0


87

In retrospect, the bond market was nei-ther the mirror image nor the companion ofthe stock market during the early 1920s.The bonds had collapsed during the depres-sion of 1920 and bottomed as rates began todecline in 1921. But contrary to what mostpeople would assume, again based upon themere fact that the U.S. had never defaultedon a Federal Bond issue, the bonds werekilled at the end of 1921. With huge de-faults and excessive European debt coupledwith large outstanding corporate issues,bonds remained plentiful.

But as the world sorted out its economicwoes, U.S. federal and corporate bonds ral-lied sharply from 75 on the Dow Jones In-de x up to sl igh t ly above 92 du r ingSeptember 1922. From that point onward,despite declining rates, the bonds fell back,dipping below 86 by March 1923. For thir-teen months the bonds traded sidewayswhile the stocks rallied. A trading rangebetween 88 and 86 had become well estab-lished. Finally in May 1924 the bonds ral-lied as call money rates began to approach

2% which proved to be a six year low. Thefirst discount rate cut by the Fed in Junecaused the bonds to explode, reaching backabove the 90 level. In July, the trend con-tinued as the bonds reached above 91. Butin August a clear and decisive divergencerevealed something that would set the tonefor the next five years. When the August 7,1924 discount rate cut to 3% took place, thebonds were unable to rally and instead fellone full point without even exceeding theJuly high. While the bonds became para-lyzed for the balance of the year, the stockmarket soared from a low in October of 99to nearly 121 by year end. The vote was in.Capital, both large and small, was rushinginto the stock market when it was clear thatdividends were far greater than bond yields.

Taxation rose during 1924 as well. Forty-six states imposed what was called the "In-heritance Taxes." This would be followedby Federal government taxes the next year,in addition to state taxes. This was one ofthe first underlying factors which wouldbring inflation back as government on bothfederal and local levels grabbed for more


88

PRODUCER PRICE INDEXannual rate of change

1901 1906 1911 1916 1921 1926

0.4

0.3

0.2

0.1

0

-0.1

-0.2

-0.3

-0.4

CONSUMER PRICE INDEXannual rate of change

1901 1906 1911 1916 1921 1926

0.2

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08

-0.1

-0.12


89

money and eventually forced upon industrya higher cost in labor.

The claims made earlier against JesseLivermore by the pessimists stated that hehad manipulated not merely the summerrally, but the exorbitant rally in the price ofwheat just to get Coolidge elected. Thosecharges were obviously proved false by thestock market’s broad rally at year end. Butin addition, wheat, which had touched $1.50earlier, had now passed the $1.75 level mov-ing into year end, and the prospects foranother cold winter had the bulls calling for$2 in 1925.

The year 1924 proved to be the beginningof a broad bull market sparked by investorsand not by over margined speculators.Business conditions were sound and corpo-rate earnings as well as dividend yieldsstood at record levels.


90


Chapter V

1925

1925 was a year of good prosperity. Thestock market experienced a little follow

through to the upside after closing 1924above 120 and on the high of the year. Therewas some topping action during January,with a modest 10% decline moving into aconsolidation phase which came to an endduring March. April registered some posi-tive gains but from May onward the stockmarket rallied, scoring new highs from onemonth to the next.

While the industrials consolidated for thefirst six months during 1925, they continuedto rally into June, reaching slightly abovethe 93 level and finally exceeding the 1922high. The bonds corrected for two monthsduring July and August as the industrialsbegan to rally sharply into November.

Once again the bonds consolidated, even-tually closing December above 93 but stillnot surpassing the June high. The Decem-ber rally in the bonds came only after theindustrials began to move lower after estab-lishing a record high the previous month.

The rails dropped sharply during March,falling nearly 8% in a single month. ButApril and May brought with them improve-ment after the panic sell off in March. Juneand July traded higher but still no new highswere achieved for the year. Then in August,the rails broke out almost reaching 104.September managed to push a little higherand the momentum picked up sharply in thefinal quarter. The rails and the industrialshad both bottomed during March and wefound the industrials loading during thesummer and peaking in November, while


91


92

the rails experienced their largest gains inDecember.

Fundamentally, January began with apositive note as President Coolidge an-nounced: "The Business of America is Busi-ness!" This was essentially true. Therailroad stocks had made an outstandingrecovery after the railroad depression ofsome years before. Actually, 1924 provedto be a tremendous year for the expandingrailroads. More new mileage came underconstruction during 1924 than in any otheryear since the war. Yet despite the added1315 miles of new rails, taxation had beenand would still be a huge obstacle to indus-try in general. For the railroads, taxationhad risen from $112 million annually in1912 to $350 million by 1924. Consideringthe gross revenues of $975 million, the divi-dends paid by the railroads during 1924were $303 million. Yet at the same time,expenses during 1924 were $563 million.Much of the outlay in capital went to expan-sion and refurbishing of old box cars. Thethreat of over taxation was dismissed by theCongress and, in fact, what had been a ma-

jor factor for the fall 1924 rally was thestatement by Coolidge that he did not in-tend to increase taxes against the railroads.Still in all, heavy taxation would eventuallyprovide one nail in the coffin in years ahead.

The stock market still attracted the so-called nonprofessional, not for leveragedspeculation, but for outright cash invest-ment. On January 12, 1925, Time magazineonce again reported the situation with cun-ning insight:

"Wall Street professionals are learning thedifficulty of being unable to see the forestfor the trees. Hard-bitten by many years ofexperience in stock speculation, they be-lieve that what goes up must come downand have therefore been led to sell shortmany of the leading speculative stocks. Butthe market keeps on upward, steadily andremorselessly. The paradoxical result hasbeen that many an amateur speculator westof the Alleghenies has by continuing to buystocks, serenely drubbed the professionalsof the financial arena.


93

Changes in N.Y. Fed Discount RateR

ate

of In

tere

st in

%

1925

J

3.5

3

2.5

2

1.5

1

0.5

0


in m

illio

ns o

f dol

lars


1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933

$5,000

$4,000

$3,000

$2,000

$1,000

$0


94

To the surprise of many today, the ac-counts of what really took place clearly il-lustrate that all the so-called analysts andprofessional traders were dead wrong. Thepublic with capital was buying for cash andas such they did not have to sell a positionon a 10% swing as did the leveraged specu-lators. The story we are most familiar withis that the poor fool on the street didn’t startbuying until the top. But that was only trueof those who had little money to begin with.The massive buying that absorbed the stockmarket during late 1924 and throughout1925 would be solid cash investment whichprovided a firm base. As such, the correc-tion into March was minimal but the con-tinued rally into year end was awesome.

Wheat was also very volatile. By Febru-ary, the predictions that wheat would reach$2 had been fulfilled. Wheat touched $2.10and then the so-called exports came out.Arthur Cutten and James Barnes both an-nounced that wheat would continue higherto $2.50. Everyone remarked that they hadnever seen such a bull market before. Rus-sia, which up to this time had been a grain

exporter, became a grain importer. For-eign demand from Russia and Europeforced the market to nearly triple early 1924levels. But just as the professionals de-clared that wheat was moving to $2.50, sureenough during the last two weeks in Febru-ary, wheat began to crack. It penetratedbelow 2 on what was termed a speculativebreak.

Industry was booming. Steel was now op-erating at 94% capacity. Money was stillreported to be easy and interest rates werelow. Gold exports continued to be heavyyet this was largely caused by extendingforeign loans. The U.S. trade balance wasstill very much a surplus in its favor. Thenin early March, the N.Y. Fed raised thediscount rate quite suddenly from 3% backup to 3.5%. Some argued that the N.Y. Fedhad raised the rate to bring a halt to specu-lation. But this proved basically only wish-ful conjecture on the part of professionalswho had been trying to sell short all the wayup.


95

The Federal Reserve System was struc-tured a bit differently at that time. Eachreserve bank maintained its own discountrate. Of course, the N.Y. Fed was seen asthe major money center. Nonetheless, thedrop in the N.Y. Fed’s rate to 3% duringAugust 1924 had not been followed by theother reserve banks. Boston, Philadelphia,Cleveland and San Francisco had fixed theirdiscount rates at 3.5%, while the remainingseven district reserve banks were maintain-ing 4%. This meant that the N.Y. Fed wasthe lowest rate in the nation. The cause ofthe rise in the N.Y. Fed’s rate was twofold:This imbalance naturally found moneyleaving N.Y. for other parts of the nation.Second, it was the N.Y. Fed which main-tained the gold reserves and the drain uponthe gold by foreign nations was becomingexorbitant. The rise in the discount ratefound the market dropping sharply duringMarch as the pessimists warned that higherrates would force the speculation out of themarket and at last a collapse would be athand. Although the market droppedsharply with the rails taking the lead, Aprilsaw no follow through and short covering

once again brought the market back up,regaining 40% of the March decline.

Nonetheless, the press chose the profes-sional side of the matter, reporting thatdoom and gloom were here again. EvenTime magazine quickly picked up on thematter and reported on March 23: "Al-though the steel barometer has failed toregister a decline so far, it is still possiblethat somebody may be holding a match un-der it. Elsewhere in business, the earmarksof a new downward trend seem plainly ap-parent. Not only have commodity prices asa whole registered their first decline formany months, but in the speculative mar-kets the drop has been especially severe.Even the much-heralded intention to ad-vance steel prices has apparently beenabandoned. Thus it may be that the recentadvance of the New York Reserve discountrate will mark a ’turn’ in business from ex-pansion to contraction. Moreover, somelines of business such as the textiles, havebeen poor all along."



PE

RC

EN

TYEARLY: 1919-1929

1919 1926

6

5

4

3

2

1

0


96

It seems consistent that as soon as themarket fell even 8% everyone jumped allover it pouring out their doom and gloom.The speculative issues were decliningmore, simply because the speculators arealways the weakest in the lot. The mere factthat one industry such as textiles had per-formed poorly all along never preventedthe bull market. Such things come out onlywhen the market stops for a moment andthen everyone looks for the declining mar-kets and assumes that they have been theleading indicators.

This we noted in 1985 moving into theNovember period. After the Dow had cor-rected from the July 1985 high, falling backto 1288 on September 17, it began to rallyand made new highs far in advance of theS&P 500, transportations, utilities andValue Line. Everyone looked at all theother indicators and assumed that the Dowwas merely a false move due to GeneralFoods, much like the disbelief about theextra dividends that U.S. Steel issued dur-ing 1923 and 1924. As we saw in 1985, ana-lysts looked around for reasons to discredit

the new highs in the Dow, and in 1925 eve-ryone looked around for reasons to pro-claim a major top.

In fact, what took place was that the broadmarket had declined by a mere 6% whilethe Dow Industrials declined merely 10%.It was only the speculative issues that de-clined by 20% and everyone assumed thatthey were the leading indicators.

The wheat market was a favorite for thebears in the stock market to point to asanother leading indicator. On March 3,wheat stood at $2.05 on the May futures butthis market fell in what remains to this dayan historic panic sell off. By March 17, theMay futures on wheat reached $1.51. Therye futures during this period fell from$1.82 to $1.10. The decline was blamed onthat infamous character Jesse Livermoreand the gossip claimed that it was a personalattack by the "Palm Beach Crowd" (Liver-more) upon Arthur Cutten. The Secretaryof Agriculture conducted an investigationinto the entire affair. The incident was re-ported as follows:

"The huge ‘bull account’ of Mr. Cuttenprovided a tempting target for the bears,whose assault was made so powerfully thatthe latter was compelled to sell some 8million bushels of wheat in Winnipeg, thushelping the decline along and enabling the’bear raiders’ to cover easily. The resultmust have been to demolish much of Mr.Cutten’s large paper profits resulting fromthe long advance of grain prices during1924. Mr. Cutten himself has declared hewas rid of his wheat and from his approvalof Secretary Jardine’s coming probe, it maybe deduced that the events of the last fewweeks have proved rather expensive to thegreat bull leader. He attributes the fall inwheat to the manipulative tactics of a ‘mas-


97

ter speculator’ in Florida, supported by apowerful group of interests."

The "Wheat Scandal," as it was known, isactually quite typical. Everyone seemed totake the side of Arthur Cutten against JesseLivermore. Yet the bull market in wheathad seriously gone beyond the limit of rea-son. The prices had reached an historiclevel in such a short time span that a correc-tion by any normal standards was certainlyin order. Had Jesse Livermore been thereor not, the market would have fallen fromits own lack of further upside momentum.

Jesse Livermore was a man who had agreat "feel" for the market. He was no moreto blame for the collapse in wheat than hewas for manipulating the stock market intoa rally from its 1923 October low. Liver-more was short the wheat but not the rye.Yet, the rye market collapsed as well. The"Palm Beach" crowd had no positions in therye market but there the collapse was dev-astating as well. In plain words, Cutten’shot air which talked the market higher sim-

ply ran out. If Livermore was guilty of ma-nipulation on the downside, then Cuttenwas guilty of manipulation on the upside.

After the wheat scandal had passed, merg-ers began to fill the papers. Dodge Motorswas bought by the investment bankers andPan American Petroleum was bought byStandard of Indiana. While everyonelaughed at Mr. Chrysler for introducing anew medium-priced car back in 1924, thegeneral consensus was that the competitionwas far too great and that he would fall. Butwhen the figures rolled in, the Maxwell Mo-tor Corporation scored an historic record.During 1924, 32,000 Chrysler cars had beensold and the stockholders cheered to suchan extent that a new corporation wasformed to acquire all the assets of the Max-well Motor Corporation. To honor the manwho made it possible, it would be namedthe Chrysler Motors Corporation.

During mid-April, the general press be-gan to talk about the top in a major businesscycle. Many continued to argue that the

U.S. CORN PRICES

Date

Per

Bus

hel

(per Bushel)

1861 1871 1881 1891 1901 1911 1921 1931

240

220

200

180

160

140

120

100

80

60

40

20

0


98

sharp drop in wheat and the speculativeissues in the stock market were a warningsign. Others pointed out that good com-mercial paper was scarce because compa-nies were simply not borrowing and thatthere were no overextended debtors amongthe large industrial corporations. Callmoney remained cheap and things seemedto be quiet for the moment. Time magazinereported that Wall Street had taken towatching and analyzing weather maps andagricultural reports as never before insearch of a clue. Many continued to feelthat if commodities declined, so would theprofits of industry and thus the stock mar-ket.

During late April, Britain resumed thegold standard and sterling took a jump fromthe close of March at $4.77 to $4.84. Theprevious par value of sterling during prewaryears was $4.86 and most felt that the smalldifference would not lend to a great amountof gold flowing out of Britain.

The British pound continued to rally tothe par level, closing at $4.86 both during

the months of May and June, but it beganto slip in July, falling to $4.85. The poundcontinued to decline ever so graduallyagainst the dollar after the British had re-turned to the gold standard. June 1925 hadbeen the high in the pound and the declineeventually reached bottom during Novem-ber 1925 at $4.84.

The Dow Jones Industrials had bottomedin March and began to trade sideways dur-ing April. May brought a sizable rally andJune continued the uptrend but with lessforce. But curiously enough, the stock mar-ket began to rally in a more pronouncedfashion in July and continued higher into aNovember high, when the dollar hadreached its peak and the pound its low. Thestock market and the foreign exchange mar-kets continued to turn and reach temporaryhighs during the same periods.

The stock market began to rally in earlyMay and the press reported that prices werestable and that perhaps prosperity was hereto stay, although somewhat hampered in itsmomentum. After a sharp month end rally

BRITISH POUNDU

.S.D

olla

r pe

r B

ritis

h P

ound

MONTHLY: 1925


4.86

4.85

4.84

4.83

4.82

4.81

4.8

4.79

4.78

4.77

4.76

4.75


99


100


101

to close on the high, everyone began to lookat the stock market again for some sign thathopefully could indicate what the futurewould hold. Others were still harping onthe fact that corporate earnings were not atall-time highs when in fact the price ofshares was. Taxation had taken its toll,somewhat reducing earnings. June was notat first much to speak about. Several timesthe market formed a double top pushingagainst the May highs unsuccessfully in itsattempt to push higher.

Finally at the end of June, the stock mar-ket pushed higher. But once again it wasnot very impressive, as the Dow industrialsadvanced by merely 2 points. But nonethe-less, it once again finished the month on thehigh, finally exceeding the May high. Al-though it was a subtle move, it definitelyillustrated that the trend was still higher.

The interest rates continued to remaineasy for the most part and a change in theforeign loans took place. After Britain re-turned to the gold standard, many nationsfound their credit ability rising and, as it did,

the interest rates declined further. Cashremained an excess commodity in theStates and bond dealers began to bid forforeign issues. The public, which had beeninvesting in the stock market, was still pay-ing cash, and broker loans were steady toactually declining. The optimism of im-proved European conditions and Britain’sreturn to the gold standard led many tobelieve that they would be big buyers ofU.S. exports and another boom was at hand.Record crops suddenly came pouring infrom both cotton and corn producers andconsumer demand continued to rise to theamazement of all the so-called profession-als who were still looking for doom andgloom.

July brought with it a rise in stock pricesagain as the Dow moved up to new recordhighs. But still it remained well within an 8point range and analysts immediatelyjumped on a sharp decline in steel produc-tion. At the close of May, tonnage wasreported at 4.05 million and June was re-ported to be 3.7 million. This was citedextensively by those who had continued to

U.S Balance of Trade with Europe

Raw Data Source: Economic Statistics

Per

cent

age

Rat

e of

Cha

nge

Annual Rate of Change

1900 1905 1910 1915 1920 1925 1930 1935 1940

1.4

1.3

1.2

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

-0.1

-0.2

-0.3

-0.4

-0.5

-0.6


102

short the market in belief that each newhigh would prove to be the final and fatallast high.

Nevertheless, they let their bias stand inthe way of interpretation. That is so oftenthe case with fundamental analysis. One isalways forced to line up the negative reportsand take a guess based upon the positivereports as to which will be the leading or thelagging indicators. At best, it has histori-cally shaped up to a fifty-fifty bet. Onereport that was definitely on the positivenote was that of the inventory conducted bythe Comptroller of the Currency. This re-port was very positive and clearly illustratedhow both resources and deposits at thebanks were continuing to grow. The largestbanking institution in the United States,The National City Bank, showed new re-cord highs. The composite of resources anddeposits had grown between April and Junefrom $910 million to $1.15 billion. Thetrend was nationwide, a very positive indi-cation once again that the system was notoverextended.

Nonetheless, in the July 31, 1925 editionof Time magazine we find an interestingarticle:

"Market Decline?"

"Col. Leonard P. Ayres of Cleveland is anadmirable prophet. Employing no myster-ies or obscure language, he states not onlywhat he thinks of the future, but also why.Thus the reader of his predictions can judgenot only his conclusions, but also his meth-ods of arriving at them.

"Col. Ayres believes that the long contin-ued advance in securities prices will bebrought to an end within the next fewmonths. Pointing out that bond prices arenow higher than they have been for eightyears, and that average industrial stockprices are higher than ever before, theColonel declares that this situation has re-sulted from easy credit rather than fromhigh current earnings or brilliant prospectsand that therefore rising interest rates thisfall will call a halt to it.

FRENCH FRANCU

.S.D

olla

r pe

r F

renc

h F

ranc

MONTHLY: 1925


0.055

0.054

0.053

0.052

0.051

0.05

0.049

0.048

0.047

0.046

0.045

0.044

0.043

0.042

0.041

0.04

0.039

0.038

0.037


103

"As proof of this view, Col. Ayres hascharted since 1890 the average yields on 60high-grade bonds and the current rates pre-vailing for 90-day ‘time money’ on securitycollateral, as well as the average price forindustrial stocks. As a rule, he discoversthat stock prices have risen during periodswhen time rates were lower than bondyields, and have fallen when time rates werehigher than yields.

"Recently, time rates have been consider-ably below bond yields, but with a tendencyof late months to seek a common level. Col.Ayres believes that in the fall, with heaviercommercial demands for money, time rateswill rise. And this, he concludes, will resultin a decline in both bond and stock prices."

The relationship which is being discussedhere is the short-term versus the long-termrates. When short-term remains below thelong-term, prosperity and rising stockprices take place. However, when short-term rates exceed the long- term (as wenoticed in 1974 and 1981), stock prices fall.

The observation is essentially correct.However, Col. Ayres was stretching thepoint at this period in the cycle. Becausethe short-term rates had run up to matchthe long- term rates as we noticed in De-cember 1924, he suggested that the end wasnear. Again, the question is not whetherthis observation is correct or not, because itis; the question is timing. The short-termrates had only matched the long- term ratesduring massive payments on foreign loanscoinciding with income tax periods and gov-ernment borrowings. Yet it failed to pro-duce a sustained effect and by and large theshort-term rates had remained under long-term rates. This at best was perhaps a warn-ing of years ahead, but it was not a sign ofimmediate disaster. When we look at 1928through 1929, we will clearly see just howfar short-term can exceed the long-termbefore a major top comes into play.

The real estate market had been pluggingalong quite nicely up until 1924. There wasconsiderable expansion in this sector due tothe expanding economy and high employ-ment. The housing shortage was officially

U.S. GOVERNMENT BONDS YIELD

PE

RC

EN

TYearly: 1919-1940

1919 1926 33 1940

5.4

5.2

5

4.8

4.6

4.4

4.2

4

3.8

3.6

3.4

3.2

3

2.8

2.6

2.4

2.2


104


105

declared to be over by June 1925 and realestate began to decline in value while thestock market still raged onward for fourmore years.

August brought a continued but slow up-ward growth in the stock market as the Dowexceeded the 140 level. In early September,reports once again clearly illustrated thatthe economy had not peaked. The generalproduction figures for July were releasedand showed a 2% gain over June but, moreimportant, it was a 20% increase over July1924.

On September 7, 1925, Time magazine’scomments about the future were still ques-tioning despite the strong production in-creases and the steady rise in the market:"There are certain clouds on the businesshorizon which later on may or may not blowup into stormier weather. The chief ofthese is the tendency of individual and in-stitutional investors alike to place funds infixed rather than liquid assets. This ten-dency accounts for much stock market ac-tivity, and for the even wider and greaterspeculation in land and improved real es-tate. So far has activity in both these fieldsgone, that the wiser heads in Wall Street andthe more hard-bitten Realtors of Miami arenow wondering where the limit is. It is notyet clearly discernible, yet many traders aredefinitely planning on ‘cleaning up and get-ting out’ both in shares and town-lots.Some day many of them are going to try todo it, and perhaps on short notice."

The press was still cautious and what wemay have thought about this period is sim-ply not true. The professionals clearlydoubted the advances and it was the smallinvestor who didn’t margin his bets whoformed the foundation of this bull market.The press was leaning more toward talkingthe market down rather than up and the

majority of professionals remained unim-pressed.

The stock market rallied again in earlySeptember reaching 148 on the Dow Indus-trials. Suddenly there was a one week cor-r e ct io n a n d m a ny st ocks fe l l 10% .Immediate ly, the press and everyonejumped on the move. "The long prophesied‘reaction’ on the Stock Exchange has come;it is yet too early to say that it has gone"reported Time magazine. Yet there was noappreciable change in the amount of moneyor interest rates. Stock market funds re-mained "abundant and cheap," reported the


106

New York Times. The reaction was justthat.

The reaction passed and instead the mar-ket thrust violently higher into Octoberreaching almost 158, which was nearly a20% gain from the reaction low. The DowIndustrials closed the month on the highamid those who began to spread rumors ofa discount rate hike, but nothing happened.The rumors served to ease the fears of theshorts but didn’t phase the urge of the bulls.

Time magazine reported in October:"Prosperous Motors - Despite direful pre-dictions which were made a year and evensix months ago, the current year will godown as the most prosperous in history formotor manufacturers. In only a very fewcases will the dollar profits of every leadingproducer fail to be the largest on record."

The rumors spread about the discountrates hike were somewhat believable. Callmoney rate had jumped up to 6%. This wasa seasonal event due largely to the fact that

funds were sent West to pay for crops.Therefore, the call money rate at N.Y.jumped but it did not rise nationwide. Theevent was also somewhat pushed aside bythe fact that the Bank of England cut theirdiscount rate from 4.5% to 4%.

By November, the market continuedhigher and came close to penetrating 160.The big news came out that there would bea lowering in the income tax rate and busi-ness cheered. The outlook for retail salesat Christmas became a lot more rosy. Thestock market pulled back to some degreebut held 150 on a closing basis by the end ofNovember, even though the volume tradinghands had exceeded all previous recordsback to 1916. Several days reached 2.8 mil-lion shares, coming close to the all-timehigh which had been established on May 9,1901 at 3.3 million shares traded.

The unexpected rate hike came duringlate November but not from the N.Y. Fed.Instead, the Boston Reserve Bank raised itsdiscount rate from 3.5% to 4%, which pro-

SWISS FRANCU

.S.D

olla

r pe

r S

wis

s F

ranc

MONTHLY: 1925


0.1944

0.1942

0.194

0.1938

0.1936

0.1934

0.1932

0.193

0.1928

0.1926

0.1924

0.1922

0.192


107

vided the decline into late November. Yetnews simultaneously came out about Gen-eral Motors, which had broken all previousrecords in both earnings and sales duringthe month of October. They had sold96,000 cars on which they had earned $12.5million in October alone.

In the December 14, 1925 edition of Timemagazine, the comments on the discountrate hikes were interesting: "There is noth-ing wrong seemingly with most lines of busi-ness or with the credit structure which

sustains them. The advance in Reserverates has so far exerted no appreciable ef-fect on merchant or manufacturer, exceptto worry and puzzle him temporarily by theunexpected manner in which they were in-augurated."

Many doom and gloomers tried their bestto point to the unexpected reserve bankhikes as being a warning of the future. Butthe market firmed in December and ralliedagain, closing near the highs with the railsshowing the strongest gains. Even the


108

bonds rallied after the discount rate hike,an event which further confounded the ana-lysts. The bottom line was quite simple.Long-term rates were rising but short-termstill remained relatively low on a consistentbasis. Earnings were high and tax cuts wereon the horizon. As long as dividends out-paced interest rates, only the public was notmoved to sell. In the end, the professionalscontinued to try to pick the top but veryunsuccessfully.

In the final analysis, 1925 brought toAmerica commercial air travel which hadbecome the latest thing. Radio stationspopped up all over the place and finallyeven appeared in Japan. New companiessuch as Caterpillar Tractor Co. continued toenter the American business scene, andbuildings such as the Chicago TribuneTower, Chicago Palmer House and theBrooklyn Museum opened their doors.Even refrigerators were registering sales ofnearly 80,000 annually by 1925. Wesson oilCo. had its beginnings, the N.Y. Cocoa Ex-change began trading, and everyone waseating Wise potato chips.

DUTCH GUILDER

U.S

.Dol

lar

per

Dut

ch G

uild

erMONTHLY: 1925


0.403

0.4025

0.402

0.4015

0.401

0.4005

0.4

0.3995

0.399

0.3985

0.398


109

Chapter VI

1926

With all the intrigue awaiting the curtain’srise in one of Shakespeare’s plays, the year

1926 dawned upon the stage before an audi-ence who remained quite sheltered fromthe ideas flourishing among the centralcharacters at the free world nations’ centralbanks. "Friends, Romans, Countrymen,lend me your ears. I have come to buryCaesar, not to praise him." As the cunningwords of Marc Antony gained the ear of themob and then manipulated them into fol-lowing the triumvirate into a war for worlddominance, 1926 had begun quite unknow-ingly in the shadow of such secrecy andintrigue.

It could not be found among the pages ofthe press for they were unaware of its exist-ence. Nonetheless, a great triumvirate wasindeed underfoot. From Britain, one ar-

rived clad in his brilliant ideas for a new eraof internationalism. His name was Mon-tagu Norman, Governor of the Bank ofEngland. He held the vision of an all-pow-erful European unity, an international sys-tem encompassing both trade and bankingpower. Although new to the position sincehis appointment in 1920, he held the viewthat only bankers were even remotely capa-ble of comprehending such a vision. Hisally in the States was Benjamin Strong,Governor of the New York Federal Re-serve.

This elite group of bankers in many wayschose to usurp a financial power on theirown, and documents later proved that dis-cussions had taken place even prior to 1925without the knowledge of either the Britishor the American government.


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The quest for power and the idea of con-trolling the world economies at their willwas perhaps no child’s dream. But, it was alofty goal and one which should have beenthought out carefully, but was not.

The European triumvirate was composedof Montagu Norman of Britain, HjalmarSchacht of the Reichsbank in Germany andCharles Rist of the Bank of France. It waslearned that these distinguished men urgedBenjamin Strong to lower the discount rateto help Europe attract much needed funds.Britain’s motive was perhaps to find ameans to firm the pound at the par value of$4.86 under the prewar gold standard. Thiswas a clear overvaluation by at least 10%.

Of course, Germany and France were stillboth motivated by their own difficulties,which left them with unbalanced budgetsunleashed by military and public works ex-penditures.

In his memoirs, Herbert Hoover wrotethat he first learned of the pact fromAdolph Miller who was a member of the

Federal Reserve Board. Miller relayed toHoover that Strong and his "European Al-lies" proposed still further "easy moneypolicies" for the United States, which meantadditional discount rate reductions. Millerhad disagreed with Strong’s proposals andfelt that he was working for the interests ofEurope and not the United States.

At the time, Herbert Hoover was Secre-tary of Commerce and upon learning of thisplot from Miller, he protested to DanielCrissinger who was Chairman of the Boardof Governors. Hoover warned him that"such action would further stimulate specu-lation and was not the remedy for Europe’sills anyway." Hoover commented thatCrissinger was a political appointee whowas "utterly devoid of global economic orbanking sense." Miller and Hoover couldnot overcome Benjamin Strong’s influence.H oove r then appealed to PresidentCoolidge but was rebuffed and told that theFed was a separate agency and the law pro-hibited him from interfering with it.


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Hoover then wrote: "I was so alarmed,however, that I took up the matter withmembers of the Senate Banking Commit-tee - the legislative father of the Board."Senator Irvine Lenroot wrote at length tothe Board, building upon informationwhich Hoover was supplying. In a memo-randum from Hoover to Lenroot, the fol-lowing passage appeared: "The effects ofthese policies upon the United States meaninflation with inevitable collapse which willbring the greatest calamities upon ourfarmers, our workers, and legitimate busi-ness."

Senator Lenroot also politely hinted tothe Board that "public exposure" of the ploywould not be a desirable outcome. The endresult of the efforts of Herbert Hoover,Adolph Miller and Irvine Lenroot was thatthe central bank conspiracy was brought toa halt, at least for a while.

Back on the surface and away from thepolitical intrigues at the Fed, the year 1926brought many changes in how people beganto look at the market. The Dow Industrials

continued the rally which had begun during1925 but came to an abrupt halt by Febru-ary. A very sharp reaction took place dur-ing March; then April and May spent a lotof time going nowhere fast. By June themarket began to rally and eventually madenew highs again during August before cor-recting sharply lower for another twomonth period.

The bond market pressed higher through-out most of 1926. Advertisements pushingbonds as the "safe and risk-free" investmentbecame commonplace. The railroads, longregarded as the finest area of stock invest-ment, followed the industrials in a verychoppy trading pattern during 1926.

The tone of the market place and theeconomy was fairly well summed up at thebeginning of the year by Time magazine:"Business prophets have spoken both opti-mistically and pessimistically at the year’sopening, and as usual the future remainsobscure to the average businessman. Cur-rent business is good; none except the an-thracite miners and a few others question

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

ndMONTHLY: 1926


4.86

4.859

4.858

4.857

4.856

4.855

4.854

4.853

4.852

4.851

4.85

4.849

4.848

4.847

4.846

4.845

4.844

4.843

4.842

4.841

4.84


112

that statement. This real interest in busi-ness relates to how long the present pros-perity will last."

During early 1926, the general tone of thePress still sounded a little bit like a doubtingThomas. The memory of the panics andcrashes, which had been numerous be-tween 1901 and 1920, still lingered on in theminds of many. Business was good. Inno-vation in the United States had continuedto progress and the growth in the stocklistings themselves attested to the numberof new business ventures. A comparison toJanuary 1, 1925, just one year prior, showedthat at the start of 1926, trading on the NewYork Stock Exchange had grown in both thenumber of issues as well as value.

It is interesting to note the trend. Thenumber of corporate bond issues had in-creased by only 35, whereas the number ofnew issues in the stock arena was 118. Cor-porations began to shift their borrowingsfrom bonds to stocks. This would be a trendthat deceived many in the years ahead.

By 1926, the U.S. had emerged as themoney center of the world; it was the placewhere foreign nations came to borrow capi-tal. As a result, foreign bonds were listedon the N.Y. exchange. As of January 1,1926, there were 116 separate foreign bondissues listed, of which 65 nations were themakers. This was broken down as follows:

No. Nations No. Bond Issues

2 Asiatic nations (3)

3 Australasia (7)

37 Europe (59)

5 North America(U.S.excluded) (17)

18 South/Central America (30)

Many businessmen at that time adhered

to the old philosophy of whatever goes upmust come down. They believed that thestock market was overdone and they contin-ued to look for pessimistic news to supporttheir contention. Other subscribed to theunderlying facts. They pointed out that atno time in history had credit been so cheapand the banking business so sound, andthese two elements combined to form a

UNEMPLOYMENT


PE

RC

EN

TYEARLY: 1900-1940

1900 1907 1914 1921 1928 1935

26

24

22

20

18

16

14

12

10

8

6

4

2

0


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good, solid age of prosperity. These factorswere true indeed. The U.S. was the world’sbanker in more ways than they knew. Eve-ryone was floating their bonds on the N.Y.markets. Banking profits were quite im-pressive. All of the top ten banks hadturned in record profits for 1925 preciselywhen credit and money were cheap.

Nonetheless, the market continuedhigher into January, reaching the 158 levelon the Dow Industrial. February saw a newintra-day high testing the 163 level. Butthen the market began to break and Febru-ary fell to close under 155. March contin-ued to decline, as the normal correctionafter an 11-month bull cycle that culmi-nated precisely during February.

Cyclically and technically, the market wasdue for a correction. All markets must cor-rect even if only for one month after com-pleting an 11-month bull cycle. Therefore,any bit of news would have been sufficient.

The news that came was Washington’srejection of a rail merger. The Van Swerin-gen brothers control led the New York, Chi-cago, St. Louis Rail road Co., The PereMarquette, Erie, Chesapeake & Ohio, andthe Hockling Valley railroads. They wantedto merge them to create what would havebeen one of the largest railroads in the U.S.,saving the company $6 million in expenses.But Washington stated that the railroadswere voted into a merger by the majoritystock holders without consideration to theminority stockholders. Strangely enough,everyone was in favour of the merger. ButWashington’s denial of the application wasexcuse enough. Wall Street was in a state ofshock and the main railroad stock of thegroup, known as the "Nickel Plate," fell 33points the very next day. Had Coolidgebroken his promise?

As the Ides of March rolled around, themarket continued to crash. It was writtenup as the worst panic since the Rich Man’sPanic of 1901 and the dismal days of Apriland May 1920. Despite the new records on


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volume, which had been established on theway up during the fall of 1925, new recordson the way down were established as vol-ume reached 3.7 million shares for the dayon March 3. The ticker was 52 minutesbehind, which only fueled more panic. Thebanks rushed out to support their clients,yet during the whole affair business was notaffected.

The broader market continued to declineinto early April under heavy selling. Badnews seemed to pour out during March andApril 1926. Although earnings were still upfor 1925, many had been expecting evengreater earnings for 1926, but now thatseemed to be an incorrect assumption.Others pointed to rising business invento-ries and immediately proclaimed the end ofthe world was near. But steel productionwas still moving at 96% capacity. By theend of March, 125 issues had made newlows for the year.

Perhaps it was Senator Lenroot’s politethreat to the Fed in late December 1925that prompted an initial retreat from the

scheme to artificially stimulate Europethrough lowering U .S. interest rates.Whatever it was, the Fed raised the dis-count rate in January 1926 from 3.5% to4%. The stock market did not interpret thishike in the discount rate to be bearish inJanuary although it created some nervous-ness. The market continued to surge higherin February following the rate hike.

Again on the foreign exchange markets,the dollar dropped from a February highagainst everything except the French francwhich continued to decline sharply into July1926. Strangely enough the stock markethad come to a halt along with the dollar.

Within the economy, several varied trendswere taking place. Unfilled orders for U.S.steel had peaked at 5 million tons in De-cember 1925. Although production itselfremained high during the first quarter of1926, it was merely catching up with thebacklog of unfilled orders. That December1925 high of 5 million tons would remainthe peak until World War II.

DUTCH GUILDERU

.S.D

olla

r pe

r D

utch

Gui

lder

MONTHLY: 1926


0.402

0.4018

0.4016

0.4014

0.4012

0.401

0.4008

0.4006

0.4004

0.4002

0.4

0.3998

0.3996


115

U.S. auto production, including trucksand taxicabs, had reached a temporary peakin January 1926 at nearly 440,000 units.This was the highest monthly productionfigure since the low of 50,000 units duringJanuary 1921.

On the banking scene, brokers’ loans hadreached a record high of $3.1 billion duringJanuary 1926. Total outstanding loans ofreporting banks reached nearly $19.5 bil-lion. In both cases, these were now abovethe corresponding record highs which hadbeen established at the peak of speculationin 1919. Brokers’ loans were then $1.5 bil-lion and total loans of reporting banks stoodat $16.5 billion.

The rate of change between brokers’loans and total loans clearly illustrated agrowing sector of speculation. But as wewill review in the years ahead, many corpo-rations were shifting toward floating morestock rather than bonds. Had that not beenthe case, then total outstanding loans wouldhave risen more dramatically to finance the

wave of innovation and expansion whichwas underfoot during the Roaring 20s.

When we look at the money in circulation,reserve credit and bank balances in com-parison to the gold stock and broker loans,a curious effect leaps out from the statistics.Note that total reserve credit peaked in1920 at nearly $3.5 billion. Yet it peaked inDecember 1925 at $1.4 billion. Bank bal-ances stood at record highs by January 1926,yet money in circulation remained well be-low its 1920 high. The expansion was notbeing financed by the Fed as much as fromcapital which was earned through the tradesurplus as well as through the flight in capi-tal to the U.S. from overseas.

The first quarter of 1926 was the onlyquarter during which the U.S. had movedfrom a trade surplus to a deficit. This deficitin trade came to a bottom with the stockmarket during March of 1926 and this nevertook place again, even through the end of1932.


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Virtually all commodities had peakedduring 1925 and the first quarter in 1926held only disaster for those markets. Silverhad managed to rally back to 73 cents in late1925. But 1926 saw a high form in Januaryat 69 cents and a continued panic sell offbrought the silver market under the lowwhich had been established during 1921.

Around the globe, the stock markets didnot respond in similar manners. In Japan,the peak came during February at about 110on their index and this proved to be the finalhigh. The Japanese market never exceededits February 1926 high and continued stead-ily lower, eventually reaching bottom dur-ing July 1930 at 41.

In Italy, the stock market dropped intoFebruary and then rallied in March counterto the U.S. trend. Curiously enough, thatMarch 1926 high was the final high for theItalian market which had reached 90 ontheir index. From there the market contin-ued lower and a drastic low at the 60 levelduring June 1927. Further manipulation on

the part of the central bankers in 1927would aid this market in rebounding backto the 85 level during May 1928, but fromthere onward, the decline would eventuallyreach bottom at 39.9 during June 1932.

In Switzerland and Sweden, their stockmarkets rallied during the first quarter of1926, pausing briefly when the U.S. markethad supported, but their uptrends contin-ued. Sweden witnessed a major high during1927 while in Switzerland, the marketreached its high during September 1928.

The Br it ish stock market declinedthroughout the first quarter of 1926, per-haps in response to the overvaluation of thepound. While the undervaluation policiesof France were continuing to add a down-ward pressure on the franc, their marketpeaked briefly during February, declinedinto March, and then rose 30% in Septem-ber 1926. The uptrend in France continueduntil the first quarter of 1928.


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When looking at all the international as-pects during the first quarter of 1926, onesees that this was the only quarter duringwhich the trade surplus of the United Statesturned into a deficit and the dollar peakedduring February. Therefore, the actions ofthe market during March seem to havetaken place in conjunction with shifts ininternational trends, perhaps more so thanwith purely domestic influences.

During April 1926, the Fed at New Yorksuddenly cut the discount rate back to 3.5%.Although there was no official comment, itseems that they perhaps took action due tothe sudden swing from a trade surplus to adeficit. But during August of 1926, the Fedwould raise the discount rate back to 4%where it would stand for one full year there-after.

Government was still enjoying its powerplays. The Ward Food Products Corp., a $2billion operation, was forced to consent andsurrender its corporate charter and to severall relations that might suggest a monopoly.The anti-trust laws were being fixed more

and more and this news was not lookedupon very favourably by the stock marketduring the spring of 1926.

Taxation was also increasing. The latestinvention was the gasoline tax. By 1926, allthe states in the Union had imposed a taxon gasoline except New Jersey, Illinois,Massachusetts and New York. The reve-nues of the forty-four states which did col-lect the tax for 1925 added up to $146million, which was up 83% over 1924, andup 450% over 1923 levels.

The stock market, after a swift and sharpkick in the pants, remained stagnant asstock prices hardly budged. Yet the steeland motor industries continued to rack upsales. Gillette bought two foreign compa-nies in Germany and Austria to furtherpush the Gillette safety razor. The N.Y.Fed suddenly lowered the discount ratefrom 4% to 3.5%. Call money rates fell toMarch 1925 levels, reaching 3%, and bro-ker loans fell to 2.5%. Bond sales werebrisk and new daily records were estab-


118

lished while the stock market still licked itswounds.

Many had warned about massive businessfailures, but there were hardly any takingplace, and in fact, failures were trending abit lower than 1925 levels. By early May theNew York Times reported: "In general thenational industry has kept at a steady gaitand seemingly will continue so. The stockmarket fluctuations did not truly reflect itscondition."

The famous Otto H. Kahn was quotedduring May 1926 and the words from suchan important banker are still quite impor-tant today. He stated in May 1926:

"E pisodes such as those which havemarked the course of stock prices and so-called Wall Street sentiment...constitute agenerally harmful nuisance. They also con-stitute a reflection on the steadfastness andsobr ie ty of a por t ion of the commu-nity...The only circumstances under which,in a country with the resources, the resil-iency and the basic elements of ours, a tem-porary descent into the cyclone cellarbecomes warranted are - leaving asidegrave foreign complications - either mani-festations of stark and persistent over-pro-duction or over-trading, the advent of amajor credit disturbance, or acute mone-tary stringency. None of these circum-stances exists today or is even remotelylikely to occur."

The commodities in general declined aswell, though they did not stop in March butrather extended into April. Yet supplies inmany sectors had dropped significantlyfrom the previous years. During April1925, for example, wheat was reported withvisible stocks of some 50 million bushels,while in April 1926 the visible supplies haddeclined to 28 million. Nonetheless, most

commodities from lead to rubber fell andestablished new lows for the year in April.

Despite the lowering of the discount ratefrom 4% to 3.5%, the stock market re-mained steady, showing little incentive torally after the March blood bath. There wasa marked flow of cash to Europe at this timethrough foreign loans. The French floateda huge loan and the proceeds were used inan effort to try to stabilize the French franc.

In Britain, strikes still plagued the nation.Coal miners, who throughout history seemto have struck every time they have had achance, went on another rampage. Many inthe U.S. were looking for coal exports topick up sharply as they had in previousyears, exporting nearly four million tons ofcoal to Britain. But this time the Brits reallygot out of hand. The strikers tried to effecta naval blockade. The Royal Navy wascalled out with trained guns ready and or-dered to blow the strikers out of the waterif they did not give up the effort.

Europe’s poor showing economically be-gan to ring a few alarms. In May 1926, theU.S. bankers quietly withdrew a $100 mil-lion loan for Italy that had been headed upby J.P. Morgan & Co., syndicating the loanthrough 1,000 U.S. banks. After the bank-ers withdrew their support for the bondissue, it fell from 94.5 to 89 virtually over-night. This did not reflect an outright dis-trust of the numerous European bondissues but there was a concern about ex-panding these already substantial loans.

In Italy, the consumer price index wassoaring. It had jumped to .34 in 1926 from.17 in 1919 (1980-100). Inflation had dou-bled during this time span. Exports hadrisen from 8.04 billion lira in 1921 to 18.54in 1926. This was a peak in Italian exportswhich would never be reached again until


119

after World War II. Imports stood at 16.91billion lira in 1921, rising to 25.88 in 1926.Exports had risen 130% while imports roseby 53%. Despite this improvement in for-eign trade, the GNP had risen only moder-ately by comparison in constant lira termsof 18.8%. Inflation was rampant and faroutpaced economic growth, drastically dis-

torting the situation. From 1926 onward,the situation became worse.

In Germany, inflation seemed at last to beunder control, registering merely 1% for1926. Japan was already undergoing sharpdeflationary pressures as their CPI droppedby nearly 8.6% during 1926. But in France,inflation was rising due to the drastic de-cline in the franc itself on world exchangemarkets. For the year 1926, inflation rose17.6% over that of the previous year. Butfrom 1921 levels, inflation was up sharply by68.2%. British economic policy was still inoverkill, forcing a deflationary period uponits population. Inflation had continued todecline as the pound rose in the face ofdeclining commodities, further reducingtheir CPI from 1921 to 1926 by 17.7%. Inthe United States, inflation was almost non-existent. With 1980= 100 on the CPI, itstood at 21.7 in 1921 and by 1926 it re-mained at 21.5. Again this was largely aidedby the relatively strong dollar against allother currencies except the pound and thedecline in the overall commodity sector.

As June came on the scene, the stockmarket began to rally. Several banks hadfailed in Florida, which had experienced atremendous real estate boom. In Boca Ra-ton, Jesse Livermore, Thomas Coleman duPont and a handful of others resigned fromthe directorate of architect AddisonMizer’s 16,000 acre project, a deal worthapproximately $40 million. People whohad subscribed for lots owed $21 millionand creditors pressed to force the projectinto bankruptcy. These events had a morepositive effect on the stock market. Thebad press that the Florida land boom hadreceived made many skeptical about realestate investments and cash began to flowback toward the stock market once again.However, real estate related stocks contin-ued to decline into July.


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General Motors announced that it wouldspend $40 million, $10 million of whichwould be invested in a new venture thatwould prove to be a fantastic money makerfor G.M. This new venture brought theestablishment of G.M.’s Hertz DrivurselfCorp. which would rent motors to the pub-lic. The news of the venture hit the streetsand everyone was talking about how G.M.was going to make a fortune and at the sametime become a major consumer of its ownproduction. As the summer rally continuedinto August, the March low in GM. was 113and the August high was 225.75.

This summer rally was not just made up ofG.M. Many other stocks did very well. DuPont rallied from a spring low of 193 to 314;U.S. Steel from 117 to 156; and Hudsonfrom 50 to 75. But Jesse Livermore wasthere. As a result, Time magazine, TheNew York Times and the Wall Street Jour-nal all reported the rally skeptically andthey doubted how much it truly reflectedbusiness conditions.

The truth of the matter was quite simple.Most companies were still showing pros-perity with all-time record earnings. Thevelocity rate of money was up nearly 11%over 1925 levels. The money in circulationwas $42.01 for every person living in theU.S. Yet steel production had backed offfrom the February high of 96% of capacitydown to 71% capacity as unfilled ordersdeclined.

The stock market came into a roaring highas G.M. declared an increase of 50% individends while the open market value ofthe stock had reached $1.8 billion. The Sec-retary of the Treasury also announced thatthere were 11,000 citizens who were worthmore than a million and that 74 people hadearned a total of $154 million in the pre-vious year. Newspapers were filled withstories that caused many to dream aboutbecoming millionaires.

The Dow Jones Industrials had been verychoppy during the first halt of 1926. Afterrallying to a new record high during Febru-ary, the March collapse was severe indeed,

SWISS FRANCU

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olla

r pe

r S

wis

s F

ranc

MONTHLY: 1926


0.1937

0.1936

0.1935

0.1934

0.1933

0.1932

0.1931

0.193

0.1929

0.1928

0.1927

0.1926

0.1925

0.1924


121

posting a decline on the index of 17%. Thatpanic in March was by no means the "nor-mal" 5% correction that we hear talk ofthese days. The industrials had fallen from163 to 135 and then during April theymerely consolidated between 145 and 136.May posed an even narrower trading rangebetween 144 and 137. June saw a rally fromthe 143.50 level up to 154 while July contin-

ued the trend, moving from 153.50 to160.50. August then punched through tonew highs for the year, reaching nearly 167,and the corrections that month all heldabove the July high of 160.50.

From the August 1926 high, the marketbegan to drift sideways during early Sep-tember, then suddenly dropped back to 156during the final two weeks. October trieddesperately to rally back over the 160 levelbut failed. Then suddenly the market wentinto another panic sell off, dropping back to145.50 and barely closing October backabove the 150 level. This time the markethad corrected nearly 12.5% between theAugust high and the October low. Again,this was no mere 5% correction.

In the October 25 edition of Time maga-zine, the commentary on the market was asfollows:

"The prices of stocks which began jigglingup and down a fortnight ago, bobbed moreviolently last week. There was a definitedownward trend. One ‘combined average’of prices estimated the general drop on theNew York Stock Exchange at 2.93 points,the lowest since the 3.89 drop March 26,when many speculators were wrong. Bondprices rose in usual antithesis to stockdrops. No underlying cause is yet discern-ible for this situation, especially since 250leading U.S. corporations earned in aggre-gate $568,000,000 during the first half ofthis year. This, according to the AmericanBankers Association Journal, is 21% morethan the $470,000,000 of last year’s firsthalf."

Here we find that Time magazine re-flected a very important relationship whicheveryone accepted in those days. Note thatTime clearly stated that the bonds movedup as the stocks moved down. This, they


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added, was a normal situation. This onceagain is strikingly different from how mostpeople now view the bond market in rela-tion to stocks. Back then, people would runinto the bonds for shelter whenever thestocks became questionable. When stockswere very bullish, bonds would decline ascapital left the bond market in favour of thestock market. This is a play which westrongly believe will be seen once againfollowing 1985.

The amount of foreign debt floating uponthe U.S. markets was quite large by thistime. Some $11 billion dollars of debt wereoutstanding by the fall of 1926. Before thewar, the trend in foreign investments hadbeen for U.S. investors to place funds prin-cipally in Canada, Mexico or Cuba. Butduring the postwar years, Europe becamethe largest single debtor to the U.S. During1913 there were only 11 foreign bond issueslisted on the New York Stock Exchange.Now that number had grown to 145 issues.Some "frontier" bond issues in what is nowWashington State were defaulted upon dur-ing 1926. But this by and large was over-looked by the bond investing public. Yetmoney continued to be cheap and abun-dant.

It is also important to note Time maga-zine’s comment on earnings. They pointedout that corporate earnings were rising andunderlying economic indicators were ap-parently indicating prosperity, yet the stockmarket corrected violently by 12.5% mov-ing into October.

Unfilled orders for steel were beginningto rise from their June low. Auto produc-tion had rallied back, sharply peaking inAugust but not failing under 350,000 unitsgoing into October. This was contrary tonormal seasonal conditions, which had pro-duced a greater rise in production during

that period in 1925 and 1924. This was theonly excuse that the bears could find to talkabout.

The French franc had dropped from itsJanuary 1925 high of 5.4 cents to 2.5 centsin July 1926. The dollar began to declinesharply against the franc between July andOctober 1926, dropping nearly 32% as the


123

franc rallied. The Swiss franc remainedsteady as did the Dutch guilder but thepound actually began to decline during thefourth quarter of 1926.

Time magazine reported once again intheir December 13 issue on the state ofbusiness affairs: "Investment bankers knowthat there is hoarded U.S. money yearningto buy safe securities, and corporations whoneed to borrow are learning this situationalso. Borrowers are willing to pay less in-terest while investors are willing to acceptless. Thus last week Standard Oil of NewJersey through J.P. Morgan & Co. offered$120,000,000 of debenture bonds at 5%.Morgan’s merely opened their books andsnapped them shut, for $500,000,000 in sub-scriptions tumbled in. Immediately, Stand-ard Oil of New York offered $50,000,000debenture bonds at 4.5% interest. DillionRead & Co. bought them all up knowingthat the bonds had a swift sale. StandardOil of Now Jersey’s yearly interest on thisitem will be $6,000,000. Had its bonds beensold at the 4.5% of its sister company’s it

would have saved $600,000 yearly in inter-est."

Many of the odd and unusual theories thatI have developed in economics are basedupon the study of events and how relation-ships come and go. One of those importantrules concerns the creation of money. Mostof the actual money created is done so in theprivate sector, whether it’s on a gold stand-ard or paper standard. The actual moneysupply was increasing during this period butthe velocity in the turnover of money wasrising on an average of 11% annually duringthis seven year period. Money was in effectcreating money. The stock market valuehad doubled and this in effect doubled aportion of the money supply as well. Peoplecould borrow on the new higher values ofthose stocks and then take the borrowedfunds and reinvest once again.

From the point of which we began lookingat the stock market in 1921 until the end of1926, the Dow Industrials had tripled inprice. The economy was still expanding andinnovation was high. Money remained

FRENCH FRANCU

.S.D

olla

r pe

r F

renc

h F

ranc

MONTHLY: 1926


0.04

0.039

0.038

0.037

0.036

0.035

0.034

0.033

0.032

0.031

0.03

0.029

0.028

0.027

0.026

0.025

0.024


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cheap despite the fact that the stock markethad tripled. Foreign investment in the U.S.economy still ranked very high.

1926 had brought with it the beginning ofGreyhound, G.M.’s introduction of Hertzand Pontiac, and Chrysler’s launching of theImperial. America moved more towardluxury cars, yet the Model-T was still a bigseller for only $350. Broadway musicalswere the rage, and this was a year of vastexpansion and a rise in American pride.Although the summer rally had beenblamed on good old Jesse Livermore, thebull market would still prove that it wasn’tfinished just yet.


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Chapter VII

1927

1927 was a very strange year. Contrary tothe standard fundamental beliefs well in-

grained in the analytical section of every-one’s mind, the bond market and stocksbecame a battleground between twoschools of thought. Every time the stockswould crack, the bonds would rally. Thiswas caused by the fact that bonds were be-ing played up as the "safe" and "secure" wayto invest money. Stocks were being toutedas a much more speculative investment.This was one noted relationship that standsin direct contrast to what we find during the1980s.

As we have just reviewed, 1926 was achoppy year for the industrials. Althoughthe trend was basically up, two sharp correc-tions had taken place with quite severe de-

clines. During 1927, the rally, which hadbeen underway during latter part of 1926,firmed up quite nicely. Only four monthsduring 1927 failed to exceed the previousmonth’s high, yet only one month had vio-lated a previous month’s low. The trendessentially remained straight up during1927, finishing on the high.

The railroads also remained in a steadyuptrend through the course of 1927. suffer-ing a correction eventually during October.The bonds were a little unstable but basi-cally remained in a sideways to higher trendin the summer and then rallied strongly intoyear end. As early 1928 approached, thefinal and complete split between the bondmarket and the stock market would eventu-ally take place.


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1927 began on a note of decent optimismbut surprisingly there was a lack of realinterest in the stock market from the specu-lative side. After getting burned in 1926many people began to turn toward the bondmarket, succumbing to the onslaught ofbond advertisements. Nonetheless, the in-dustrials began to rally in February, scoringmajor new highs once again exceedingthose established during 1926. The mainfundamental was, of course, the impressivelist of earnings for 1926.

U.S.Steel made an impressive earningsshowing. Many had regarded U.S. Steel asthe bulwark of American industry. "Assteel went, so did the fate of the nation," wasone saying which perhaps overembellishedsteel’s importance. In retrospect, this en-tire bull market began with the auto indus-try leading the way. Nevertheless, after newhighs on the industrials were made in Feb-ruary, the press was filled with stories aboutdoom and gloom in March. Although thestock market didn’t collapse, it did pausefor a while before new highs came into play.

It was reported in March of 1927 that inDetroit 45,000 fewer men were employedthan in March 1926. This, coupled with adecline in unfilled orders in the steel indus-try, prompted talk about how unprosperousthe winter had been. Perhaps the rise inunemployment at this time was created bya peak in U.S. exports which took place in1925. No one knew this fact and as themarket began to move higher in the monthsahead, this was not understood until it wastoo late. As usual, the response was an-other factor that created additional prob-lems through its side effects. In this case, itwas the Smoot-Hawley Tariff Act of June1930 and the age of massive protectionism.

Money, on the other hand, remained veryabundant. Interest rates were still declin-ing as reflected by the Treasury first quarterborrowings, which were $450 million inTreasury Certificates paying 3 1/8%, and anew offer ing of a five-year note thatbrought 3 1/2%.


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The Industrials rallied quite nicely duringApril, reaching new record highs onceagain. This was largely due to the fact that$500 million was paid out in dividends dur-ing April among 500 U.S. corporations forthe first quarter of 1927. The largest of alldividend payments was noted by Timemagazine, which wrote: "The largest extradividend, $60 a share, was paid by a rela-

tively obscure concern, Pratt & Whitney,manufacturer of aircraft."

The April rally once again establishedrecords in volume and in the number ofvarious shares traded. There were 1100issues listed on the New York Stock Ex-change and trades took place on 651 differ-ent stocks in a single day, exceeding theprevious record of 649 which had been es-tablished in March of 1926.

William C. Durant, the original founderof General Motors who lost control and wasousted twice, spent $21,000 to advertise hisintention to form a new motors company tocompete against General Motors. Thepress didn’t take too kindly to the ad andneither did Wall Street. Durant Motors Inc,which traded on the Curb Exchange, firmedslightly but it failed to rally significantly.

Meanwhile, May brought with it a littlemore than just flowers. New highs werescored once again as the industrials ap-proached the 175 level which now camevery close to tripling the 1921 low. Seats onthe exchange rose from $185,000 in Januaryof 1927 to $200,000, which was substantiallyabove the 1925 level of $116,000. Businesswas good in many industries despite exportsbeing down. But quietly behind the scene,investment capital from Europe continuedto make its way into the U.S. economy.

Perhaps it was jealousy that made govern-ment feel like it was missing out on theaction. After inventing the inheritancetaxes, government constantly sought newideas for innovative taxation. The CensusBureau released its calculations for real es-tate taxes collected during 1925 in 247 cit-ies. The valuations for tax purposes cameup to $63.5 billion. New York was valued at$12.9 billion, Philadelphia $3.9, Chicago$1.8, Boston $1.8 and Los Angles $1.3 bil-


128

lion. The taxes levied were $2.5 billion andthe national deficit on the local level was$400 million. Only 44 cities out of 247 hadcollected enough in taxes to meet obliga-tions. Many local governments continuedto waste money and raised necessary fundsthrough new bond issues. Many of theseissues would go into default once the GreatDepression hit. The City of Detroit’s bondissue would be one example of a defaultwhich was not redeemed until 1963.

Meanwhile, trading was steady and Mayfinished on the high of the month. Anotherseat traded in late May, this time fetching$215,000; the next day another bought$217.000. The seats themselves were mov-ing up even faster than the stock market.

The famous Virgil Jordan, chief econo-mist of the National Industrial Council atthe time, delivered a very profound speechat the annual meeting in 1927. He stated:"The business forecaster who attempts topredict the business outlook for the rest ofthis year and for 1928 is up against it, if he

relies upon most of the current and fashion-able methods of prognosticating. For somereason the old medicine no longer works.There may be a slight further recession inbusiness for a short time, but it is likely toend in a real business boom rather than ina genuine depression."

Virgil was a very intelligent man. He wassmart enough to recognize that the so-called normal or traditional methods ofeconomic analysis were not making anysense. This always seems to be the casewhenever you really need some answersfrom the economic community. Going intoearly 1985, we found that the U.S. dollarmoved contrary to trade deficits, expansionin the money supply, and it only hadstrength as interest rates declined fromtheir highs of 1981. Similarly, back in the20s the normal economic theories wereleading to much confusion. Traditionally, aswe read earlier, many believed the declin-ing interest rates illustrated a lack of de-mand for money and was therefore anindicator of depression. The stock market


129

was moving higher, yet there was no sign oftight money. This was very confusing toeveryone, especially those who had con-stantly called for a depression on everydown tick in the stock market. What theydidn’t realize was that the United Stateshad not merely become a creditor nationwith a huge trade surplus and half theworld’s gold reserves, it had become a na-tion of safety and security; a place wherecapital could reside without fear of govern-mental devaluations occurring overnight.

This wave, in our analytical terminology,was a wave of "private confidence." Moneyflowed from overseas into the U.S. stockmarket largely because it was a safe havenfrom declining or unstable currencies inEurope where an atmosphere of distrustexisted toward government itself. Moneyrates remained cheap because of the influxof foreign capital as well as the trade sur-plus, which had peaked but was decliningsince 1925.

A few mixed signals began to develop dur-ing 1927. The stock market was rising alongwith corporate earnings, but governmentwas passing hordes of laws in areas wherethey should never have been involved.Taxation was rising. The income tax, whichhad been instituted to pay for World War I,had never been repealed as was originallyintended. In the movie industry. wage cutswere taking place. During June, Para-mount cut wages by 10%. Others eventu-ally followed suit in some manner oranother. This was the beginning of a verysubtle trend that eventually provided thehidden cause behind what would later be-come known as the Great Depression.

The government was slowly trying to cashin on the profits of industry but instead ofbeing satisfied with a proportional increase,it chose to increase its share. The State ofNew York took the position that "good will"of a company was something for which an-other would be willing to pay in a takeoveror merger. Therefore, it tried to tax corpo-rations on such a basis. A small company


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was always the likely starting place sincethey had less money and obviously couldnot afford a long and costly court battle.The firm selected by New York was A.Breslauer, Inc., a dealer in human hair forthe wig business. The owner wrote in aletter to the New York State Tax Commis-sion: "The business has no good will of anyvalue. The business conducted by the cor-poration is that of dealing in human hairgoods. Since the fashion of bobbing haircame in, the business of dealing in hair hasshrunk considerably and has destroyed thegood will which any business of this naturemay have had in prior years."

The actions of the State of New York totax not only on current earnings, but on thefuture ability to make profits, is not unique.Every state as well as the Federal govern-ment has at one time or another attemptedto collect taxes in an unethical manner,making a total mockery of the Constitutionand the principles upon which the founda-tion of the United States was established.Much of the true blame for the Great De-pression is due to governments’ usurpationof power which undermined the structureof the economy.

Taxation has always been merely a form ofofficial extortion. Good government doesnot tax its people unnecessarily nor does itconspire against its citizens on mere techni-calit ies. Adam Smith warned that in-creased taxation would lead to higherinflation because it increases the cost oflabour which is the largest part of the ex-penses for business. Thomas Jefferson alsostated: "A wise and frugal government,which shall restrain men from injuring oneanother, which shall leave them otherwisefree to regulate their own pursuits of Indus-try and improvement, and shall not takefrom the mouth of labor the bread it hasearned. This is the sum of good govern-

ment, and this is necessary to close the cir-cle of our felicities." At that same annualmeeting of the National Industrial Council,a cry against this trend in government camefrom the Secretary, M.J. Hickey. He stated:"If our leaders of government and the peo-ple of the United States really care aboutthe liberties for which our forefathersfought, bled and died; if they want a generalrestoration of our institutions of law andorderly social progress, they must promptlyunite in halting the present ceaseless andunnecessary making of laws by Congressand the State Legislatures."

Nevertheless, there were some underly-ing signs that warned the economy wasweakening in some sectors. The wage cutsand rate of unemployment were still risingin many industries. State and local bondissues continued to flood the market at anever increasing rate. They were joined bynumerous foreign government bond issues.The amount of debt on these two levels


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overshadowed the Federal Government’sposition, which was relatively flush withcash in comparison.

On our economic models, the major topcame in during October 1929. But duringthis wave, confidence was focused upon theprivate sector and trust or confidence ingovernment was seriously declining world-wide. During 1927, we found more andmore commentary of a derogatory naturetoward the growing bureaucracy and thisprompted the focus upon private invest-ment. Despite the lack of speculative par-ticipation during 1927, as we pointed out inthe years before, broad buying by the publichad become widespread during prior years.

The import-export figures at the end ofJune had been favourable. This providedone of the fundamentals that started themarket rallying during July. The figuresillustrated a favourable trade surplus forthis fiscal year ending June 30. However,the trade surplus had reached its peak dur-ing 1925 and declined steadily. Exports hadpeaked in 1925 while imports from Europe

continued to increase, reaching their peakduring 1929.

The market had paused briefly duringJune, but in July the market soared onceagain to new highs and closed on the highat the end of the month. The market con-tinued higher into August amid headlinesthat seemed to have merely a different daterather than events. The Brits expelled abunch of Russians for spying and, of course,the Russians sent the Brits packing fromMoscow. Advertising was growing tremen-dously. There were newspapers and maga-zines in which you could find tons of ads forbuying bonds all claiming the "safe" invest-ment. But industry was also advertisingheavily, which kept the names of the com-panies before the people, and this in turnhelped to fuel the market by giving it a senseof success. Lucky Strikes were being pro-moted at the annual cost of $3.3 million inadvertising. Chevrolet was spending $4.1million annually, Dodge $3 million and Lis-terine $3.4 million.

TRADE BALANCE U.S. - EUROPEpercentage change - annual basis

1919 1924 1929 1934 1939

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0

-0.1

-0.2

-0.3

-0.4

-0.5

-0.6


132

As September came rolling around, theDow Industrials soared once again, thistime nearly reaching the 200 level. Thepapers were filled with the raging war be-tween America’s Standard oil and Britain’sRoyal Dutch-Shell. The one curious powerplay the Russians did use against Britain forbouncing their spies out of England was thecontract for Russian oil. The contract ne-gotiation between Royal Dutch-Shell andRussia was lengthy. But the spy incidentupset the Russian pride, as always, and thecontract, worth hundreds of millions, wasawarded to Standard oil, a decision in-tended to be a slap in the face to Britain.The controversy continued for severalmonths as Britain claimed that it was un-ethical to buy Soviet oil. The U.S. askedthat if it was unethical to buy oil from Rus-sia, then should it not be unethical to alsosell any goods to Russia as the British weredoing in many other commodities.

In the midst of all this, commodities werenot exactly making new highs. Many farm-ers were suffering from low prices. In Au-gust, the Kansas City Federal Reserve Banklowered its discount rate from 4% to 3.5%.This left the remaining 11 Federal Reservebranches all fixed at 4%. But within twoweeks thereafter, the Federal ReserveBanks of New York, Boston and St Louisalso reduced their discount rates from 4%to 3.5%. The real reason behind the dis-count rate cuts started a furious controversyin itself.

The Journal of Commerce reported thatthe discount rate cuts were due to what wewould now call a G-4 meeting. The Gover-nor of the N.Y. Fed, Benjamin Strong, metin Washington with the Federal ReserveBoard and with Governor Norman of theBank of England, Deputy Governor Rist ofthe Bank of France, and Dr.H ijalmar

Sch act , t h e h e ad o f t h e G e r m anReichsbank.

The Journal of Commerce charged: "Thelittle New York group that dominates theFederal Reserve System came to Chicagoand tried to induce the directors to cut the(discount) rate and afford pretext to NewYork. The request was flatly and somewhatindignantly refused. Kansas City on theother hand consented and started the ballrolling. Europe and particularly Englandwants, and no doubt needs, a very lowmoney market in this country so thatAmerican bank funds in large totals may beattracted to England; and to that end ourdiscount rates are to be reduced, and prob-ably Federal Reserve securities are to besold, and easy credit is to be manufactured.What Europe wants, and what the presentFederal Reserve manipulations are in-tended to provide, is an artificial expansionin our business, an increase instead of adecline in commodity pr ices; so thatEurope may get more money for the goodsshe sells to us and so that we may sell socheaply to our foreign customers in compe-tition with Europe."

The Wall Street Journal also reported:"American banks are finding it profitable to



PE

RC

EN

T

YEARLY: 1919-1929

1919 1926

6

5

4

3

2

1

0


133

place surplus funds in London, owing tohigher level of money rates there, and suchtransfers of dollars into sterling have beena leading cause of firmness in the sterlingrate this week. Some American funds arealso being placed in Germany to take ad-vantage of higher rates prevailing in Ber-lin."

The central bank conspiracy which AdolfMiller uncovered back in 1925, had notdisappeared. It had only adopted a lowerprofile until a credit crisis in Europe wasbecoming intolerable. There is no doubtthat much of the cause for the Great De-pression can be traced directly to the esca-lating taxation and the actions of theFederal Reserve Board in favour ofEurope. Europe was an economic basketcase and the huge amounts of foreign bondissues floating on the New York Stock Ex-change will attest to that statement. De-spite the fact that billions of dollars hadalready been lent overseas to try to rebuildEurope, there was little improvement.Strikes in Britain were continuous through-out the years, robbing that nation of valu-

able productive resources. The peoplewere striking for themselves and took littleconsideration of the fact that the war debtsand the rebuilding of Europe required aconcerted effort.

The U.S. stock market rallied into Sep-tember and the industrials nearly reached200 on sound economic principles in theU.S. as far as corporate earnings were con-cerned. But the controversy over the "G-4meeting" and the subsequent drop in thediscount rate did not die so easily.

During the week of September 12, theFederal Reserve Board met in Washingtonand fixed the discount rate for all reservebanks at 3.5%. The controversy came atthat time with the Federal Reserve Boardoverruling the Chicago, Minneapolis,Philadelphia and San Francisco reservebanks, which were opposed to the lowerrate in favor of European economic stimu-lation.

At the time of the discussions that broughtabout the Federal Reserve Act of 1913,

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

nd

MONTHLY: 1927


4.88

4.878

4.876

4.874

4.872

4.87

4.868

4.866

4.864

4.862

4.86

4.858

4.856

4.854

4.852

4.85


134

there were essentially two arguments con-cerning who would have the power to setthe discount rates. William Jennings Bryanargued that the power should be central-ized with the Federal Reserve Board inWashington and others argued that eachreserve bank should have the right to estab-lish its own rate according to local condi-tions. The eventual compromise was thatthe reserve banks would submit to theBoard for approval any proposed ratechanges. Thus, this action was a politicalpower play at that time which was notlooked upon favourably by the press.

Money, which might have found its way toEurope, was instead flowing to the reservedistricts which had maintained the higherrate of 4%. Obviously this was counter pro-ductive to the goals of the 1927 G-4 meet-ing. The dollar had been super strongattracting European investors in the stockmarket for many years, largely due to thepoor economic conditions and the instabil-ity in economic policy which had prevailedthroughout Europe. So once again, Europecried unfair and requested the U.S. to lowerits interest rates so that they would attractthe capital needed to pay their debts. Inturn, this measure sought to lower the valueof the dollar and support the Europeancurrencies on the foreign exchange mar-kets, a tactic which was repeated in late1985.

The chairman or Governor of the FederalReserve Board in Washington was DanielRichard Crissinger. His response to thepress’s allegations of what was really takingplace was short and brief: "The Federal Re-serve Board established the rate of 3.5% forsound reasons. That is all there is to it."The Chicago Journal of Commerce wrote:"It would be much easier than Easternbankers know to make a political issue ofthe Federal Reserve System but difficult

would be the defense of it if an issue weremade."

One week later, Daniel Richard Crissin-ger, Governor of the Federal ReserveBoard, tendered his resignation. He de-nied that the dispute had anything to dowith his resignation, as all such politicalresignations traditionally do. The point ofthe matter was that he had forced the re-maining member banks to lower their rateswhen there was no real legal grounds fordoing so. Money remained substantiallyabundant and there was no need to lowerthe rate just when the Dow industrials wereclose to reaching 200 for the first time inhistory.

At the height of the stock market fury, newrecord levels were also attained for theseats. In September, a seat was traded at$230,000 which was now nearly double thatof 1925. Even the Curb Exchange seatstraded at $32,000.

October opened on a high note just as theRadio Fair at Madison Square Garden wasjammed with 300 exhibits. General Elec-tric exhibited the "photo-electric cell,"which generated power through obtainingenergy from sunlight. Just as innovativedisplays were everywhere, the market tum-bled by 10% in a sharp drop of 20 points,nearly finishing October on the lows for themonth.

From overseas bad news hit. In Japan aserious banking failure had taken place inthe spring. Small banks were in trouble andthe trouble only became worse. The publicpanicked and began withdrawing fundsfrom the small banks and transferring themto the larger banks. Japan had 1300 banksbut it appeared as though scarcely morethan 200 would survive. These events laterproved to be positive to some extent. The


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larger banks ended up with large cash sur-pluses which aided the reconstruction ef-forts still going on due to the devastatingearthquakes of years before and the gener-ally poor economic conditions which pre-vailed.

In the U.S., automobile sales were up forsome but down below 1926 levels for theindustry as a whole. As business slackenedoff to some degree and the assembly linecontinued to improve production, the in-dustry employed 40,000 less than the yearbefore. The trend began to shift away fromeconomy cars, such as the reasonably pricedModel A and Model T lines for which Fordwas known, and the touring car gainedpopularity. This boosted sales for G.M. anda battle between Ford and G.M. began toget a lot of press.

Ford’s production for the first six monthsof 1927 was only 332,384 while G.M.’s pro-duction was 586,444. The shift can be notedeasily by reviewing the sales records ofChevrolet and Ford. In 1924, Ford’s sales

were 2,083,545 and Chevrolet’s 587,341 butby 1926 Ford’s sales were 1,810,000 whileChevrolet’s reached 1,234,850. During thefirst six months of 1927 it was shocking tosee that Ford had fallen so far behind. Butthe trend was clear. Sales of the cheap carswere declining and sales of expensive carswere rising. Unemployment among theworking class was beginning to rise. G.M.was on the mark with catering toward thetouring car market rather than the lower-priced end of the line where money wasbecoming tight.

The credit for the October panic does notgo solely to the subtly rising unemploymentor merely to the banking crisis in Japan.Unemployment figures were not publishedbecause they were not gathered from anyone source. But the true credit belongs inpart to the controversy over the discountrate cut. Surprising as it might sound, themarket didn’t like the cut. It was viewed aspotentiallydangerous and certainly potentially infla-

tionary.


136

When the press turned its attention to theoutstanding foreign loans, the market be-came nervous indeed. After all. there were255 foreign bond issues on the New YorkStock Exchange floating around with avalue of $4,650,000,000. And in addition,the exchange had just approved foreignstock issues for listing on the New YorkStock Exchange that month. News began toleak about the U.S. banks, which had lent$1.3 billion to foreign borrowers for theperiod of January to October. This wasmore than the entire year of 1926 and thensome. Obviously, the immense demand formoney from overseas was becoming unbe-lievable and for this the Fed lowered therate on top of it. This brought estimatesfrom Washington stating that outstandingforeign loans by U.S. banks would reach$12.5 billion by year end.

Where was all this money going? Ger-many had been advanced $262 million,which was more than half of the $508 mil-lion which flowed to Europe as a whole.Canada received $286 million, Latin Amer-ica $375 million and in the Far East $122million was loaned.

In November, Time magazine quoted Dr.Charles Herty: "Struggling to assert indus-trial supremacy, Europe, led by Germany,is challenging U.S. trade in world marketsby the establishment of huge cartels forcontrol of production and fixation of prices.Recent affiliations of foreign chemical andsteel interests are belligerent gestures." Hecontinued to state: "This is a foreign men-ace to U.S. peace and prosperity...Are ourbankers simply middlemen or brokerswhose only thought is the commission theywant? It is reported throughout the Euro-pean press that German cartel, the interes-sen Gemeinschaft Farbenindustrie, has,through exchange of stock, merged with the

Norwegian Hydro-Electric Co. and that thelatter is contemplating a great expansion ofits operations for fixation of nitrogenthrough a loan of $20 million which it ex-pects to get through one of the great Ameri-can Banking organizations. Is it right thatthe savings of our people should be directedby this institution to the support of a Euro-pean monopoly which will seek the destruc-tion of the American nitrogen fixationindustry, now so rapidly developing in thiscountry?"

Many blame to this day the Smoot-Hawley protectionism act as a major causeof the depression. Yet, was it the protec-tionism that caused such a blow or the U.S.government’s own exercise of power thatprevented U.S. industry from reaching thesize of European monopolies? Time maga-zine reported on Washington’s opinions inreference to Dr. Herty’s major doctrine re-garding Europe’s vigorous industrial atti-tude. "They demur at his denunciation offoreign loans. They would fight back byEurope’s methods. U.S. business cannotnow. They are blocked by the ShermanAnti-Trust law which forbids amalgama-tions likely to stifle competition. So theyargued repeal the Sherman Anti-Trust law,or at least amend it to permit unification ofU.S. industry to strike as a unit against simi-larly organized European blocs." Timemagazine reported that the Administra-tion’s attitude was "sympathetic" but "notampering with the Sherman law will betolerated."

Had the U.S. listened to Dr. Herty closely,perhaps the protectionism would have beenavoided. The administration loved thepower to haul in a big company and force itto give up its charter thus breaking downthe power of the private sector. This hadbeen done with a vengeance all in the nameof the people. Yet while Europe borrowed


137

from the U.S. in ever increasing amounts toform monopolies and then fix the prices, forwhich any American firm would have beenthrown into jail, the trade war could only beexpected to become worse in the yearsahead. Once again, government’s lack offoresight and refusal to relinquish poweronce seized was a primary cause for thedepression which was now only two yearsaway.

In October, the head of the top Europeanchemical producers met in Paris. Attendingwere leaders from German, French, Britishand Belgian industries. They reached anaccord consolidating their companies toform what some would later call the "BillionDollar Chemical Cartel." The total U.S.exports of chemicals during 1926 were $171million. This new cartel was boasting astheir goal an estimated $500 million in pro-jected exports, largely to the U.S.

The President of the Chemical Founda-tion in New York, Francis P. Garvan, madea statement in response to this cartel: "Isthere an American with soul so dead as not

to thrill at this threat? What was our posi-tion in 1914? That position can come againand will come again unless all Americanpeople unite against this combine threaten-ing their peace and their prosperity. Don’tmake the mistake of thinking this is a dyefight, or a nitrate fight, or a rayon fight or afight for European or Asiatic markets. No,it is a fight to reassert European, in realityG erman supremacy in chemistry andchemical progress and that means Germanmilitary supremacy. America will neverjoin such a combine."

Ironically, the very laws which were en-acted under the pretense of protecting thefree enterprise system, in combination withthe ever increasing taxation, and the will-ingness to lend money overseas under-m ine d the U .S. indust r y, incre asedunemployment and reduced intentionallythe U.S. surplus in trade.

Nevertheless, it was during the fall of 1927when the issue of foreign loans began tocatch the eye of the media. The U.S. gov-ernment had passed another law forbidding

FRENCH FRANC

U.S

.Dol

lar

per

Fre

nch

Fra

nc

MONTHLY: 1927


0.0393

0.03929

0.03928

0.03927

0.03926

0.03925

0.03924

0.03923

0.03922

0.03921

0.0392

0.03919

0.03918

0.03917

0.03916

0.03915

0.03914

0.03913

0.03912

0.03911

0.0391


138

any foreign nation from selling their bondsin the U.S. unless they had reached anagreement with the U.S. government to re-pay any official loans outstanding from theWar.

International borrowings were becomingsubstantial on the part of Europe. France,for example, had $70 million in outstandingbonds which had been sold in the UnitedStates. With the Fed lowering the discountrate, France sought to retire its bonds,which were paying an 8% rate but experi-encing some problems over the restrictionof loans due to the U.S. government. Theycleverly entered into a deal with the Swed-ish Match Co. which bought $75 million inFrench bonds paying 5%. The complexityof the deal is illustrative of how foreignloans were being handled to get aroundU.S. laws.

The Swedish Match Co. was the largestproducer in the world with net assets of$162,934,000. France gave the company ac-cess to market its products in France, whichhad previously been controlled by a French

monopoly. Then the Swedish Match Co.owned the International Match Co., whichwas a U.S. corporation, and the U.S. divi-sion in turn issued $50 million of its owndebentures and marketed them at 5% toU .S. cit izens. This clever maneuveravoided any possible problems the Frenchmay have had with the U.S. officials.

It was also during late October when theAmerican Banker’s Association met inHouston, Texas. Senator Caraway of Ar-kansas addressed the assembly charging thebankers with the defeat of the farm reliefbill in the House. The bankers denied itand then refused Senator Caraway permis-sion to address the assembly any further. Inthe midst of this turmoil, other charges alsoasserted that the bankers were favouringforeign lending and neglecting domestic in-dustries that needed help right here athome. The scheduled discussion on foreignloans was canceled from the roster on theexcuse that Senator Carter Glass of Vir-ginia was unable to attend due to personalfamily illness. The convention broke up,agreeing to meet in Philadelphia in 1928.

SWISS FRANC

U.S

.Dol

lar

per

Sw

iss

Fra

nc

MONTHLY: 1927


0.1932

0.1931

0.193

0.1929

0.1928

0.1927

0.1926

0.1925

0.1924

0.1923


139

There can be no doubt that the banks werewilling lenders to foreign nations as well asprivate companies. The primary reasonwas that foreign loans traditionally paid aminimum of 2% over that of domestic U.S.loans. Thus, the Central Bank intervention

sought to lower the dollar and strengthenthe European currencies. This in turnwould make repayment of U.S. loans by aforeign nation easier than if the dollar hadcontinued to rise.

Meanwhile, the stock market continuedto be very choppy. October made a newhigh but it also corrected quite sharply by10% after the discount rate cut. This waslargely viewed as potentially inflationary al-though, oddly enough, we look at this in theopposite direction today. The bonds con-tinued higher as people scrambled to lockin higher yields in the face of decliningrates. The railroads abruptly fell from 145to 133.5 during October as well. The gen-eral tone was one of despair blaming shortinterest but the "depression" was alsoblamed in many economic sectors, particu-larly the farming industry.

November saw the markets recover whilethe industrials actually achieved the highestmonthly closing, yet they failed to exceedthe October high. The railroads were notas fortunate. The bonds continued to soarand exceeded 99. The rally was largely dueto the quick buck theory. The October col-lapse had been so sudden and so profitablefor the short interests, that short-coveringcame in rather quickly as the market ralliedback for month end.

December found the bonds rallying onceagain, coming close to 99.5 and finishing1927 on the high for the entire year. Therailroads rallied above the November highbut failed to exceed the October high oreven close above the November closingprice. The industrials, however, managedto continue higher and at last broke abovethe 200 mark, closing the year on the highpoint.


140

The U.S. economy was still strong al-though foreign loans were subtly beginningto affect the soundness of the underlyingeconomic conditions. Call money rates de-clined to 3.5% and the New York Timesreported that although rates were excep-tionally low, money was simply not findingits way into the stock market. It seems al-most ironic that the Dow was at all timerecord highs yet speculative interest wasjust not there in droves. The New YorkTimes reported that money was movinginto bonds.

Yet there was some contradictory infor-mation, which was perhaps one reason whythe stock market in the United States wouldcontinue higher into 1929. The Departmentof Commerce issued a report prior to yearend revealing for the first time some inter-esting statistics. For 1924, the total U.S.income was estimated to be $79 billionwhich worked out to be $685 per person.This was compared to other nations whichclearly illustrated the supremacy of the U.S.position. Great Britain’s income was $430

per person, France $225, Germany $210,Canada $270, Italy $105 and Japan $45.

The foreign loans resulted in a mass exo-dus of gold reserves from the U.S. duringthe fourth quarter of 1927. More bond is-sues were beginning to flood the market.Poland, through Bankers Trust Co., madean offering of $47 million paying 7%. Braziloffered $41 million paying 6.5%, but simul-taneously sold an additional issue amount-ing to a combined total of $85 million,which was the largest single offering at anyone time on record. The Central Bank ofGermany offered $45 million at 6% pricedbetween 95.5 and 96.5. The Commerz undPrivat Bank of Hamburg and Berlin offered$20 million at 6%. The Free State of Prus-sia offered $30 million paying 6%.

There were numerous other foreign offer-ings from Berlin, Hanover, Saxony, Prussia,Baden, Munich, Bresiau, Frankfurt, Ham-burg, Chemnitz, Lepzig, Mannheim, Essen,Dusseldorf and Hagen, many of whichwould never be repaid.

DUTCH GUILDER

U.S

.Dol

lar

per

Dut

ch G

uild

er

MONTHLY: 1927


0.404

0.4035

0.403

0.4025

0.402

0.4015

0.401

0.4005

0.4

0.3995

0.399


141

Columbia offered $5 million at 6%, Cityof Bucharest $10 million, Hungarian Mort-gage Land Bank $8 million and $5 millionwith the Deutsche Bank. The total amountwas staggering. But once again, politiciansdid not respond to a major problem until ithad become a crisis.

The commentary offered by Time maga-zine concerning the sharp October drop of10$ in the stock market adds a little flavourto the atmosphere at that time. As publish-ed by Time magazine on October 31, 1927:

"The stock market last weak registeredone of the most exciting periods in its his-tory. Prices of time-tried shares, long lead-ers in what has become known as theCoolidge market were slashed unmercifullyby the short interests, marking a decline onthe exchange that reflected the countrywide depression now being experienced inalmost every avenue of trade. U.S. Steelcommon, General Motors, General Elec-tric and N.Y. Central shares known as fi-nancial bellwethers and representative ofindustrial railway and utility activity, wereunable to offer their usual resistance to thepresent economic disquiet and concludedat prices considerably lower than they havenotched for months. The condition in thestock market in relation to money availablefor borrowing constituted almost a paradoxin last week’s trading. This ‘money’ repre-sents funds that banks are willing to lendauthoritative brokers in financing theirtransactions. There was a great deal of itavailable last week and the interest rate fellat one time to as low as 3.5% for this classof borrowing which is known as call moneyor short-term loans."

The dollar continued to decline againstthe foreign currencies but reached its lowduring early 1928. Time commented onthis as well: "This to economists was a

healthy sign regarding world conditions. Itmeans that gold will be shipped from theU.S. to other nations if their money goesabove par." This attitude was based uponimports costing less because it would becheaper to pay in gold rather than to pay apremium for the currency. But in realitythe dollar was declining because of the mas-sive borrowings which were leaving the U.S.in favour of overseas. Even foreign corpo-rations were borrowing in the States such asthe bond offerings from Girocenrale ($20million) and United Westphalian ElectricWorks ($15 million) which were only twomore German bound loans.

The bond offerings were coming close tothe $2.5 billion level during the fourth quar-ter. The last week in October alone saw$263 million in bond offerings during a sin-gle week. But even this was not a record,for that distinction belonged to the week of


142

February 4 1927 which had totalled $303million.

P r e sid e n t Co o l id ge m a d e an an-nouncement at the end of October in whichhe stated that the "business and trade con-ditions of the U.S. were healthy and thatbusiness is better than it has ever been."

Wall Street was turning bearish at the yearend. Analysts cited the 11% decline in rail-road receipts and noted that freight carloadings were off by 4.5%. These factorsturned everyone skeptical as to how far themarket could move. Yet as we pointed outthe markets basically consolidated duringNovember and December with the indus-trials moving up during the later part ofDecember. Despite this fact, lower interestrates were still a past indicator of depres-sion because lower rates showed a lack ofdemand for money and subsequently lessspeculative interest in the stock market aswell as industrial expansion.

Yet the conflicting economic indicatorswere almost everywhere, confusing manyinvestors and, as usual, dividing them intotwo schools of thought: bullish and bearish.The retail sales were still buoyant. Therewere sixty-two chain stores selling every-thing from the 5 & 10 cent items to shoesand furniture. As of November 1, saleswere reported to be collectively $943 mil-lion, which was $106.5 million above thesame period for 1926. Industry activity wason the whole 14.45% greater than that re-ported for 1926. The famous Great Atlan-tic Pacific Tea Co., not commonly knowntoday as A & P food stores, alone showedsales which exceeded $200 million. Thestock was very closely held so quotes wererare and sales even rarer. Had the A & Psales been included, this would haveboosted the chain store group beyond $1billion.

During late November, following a lot ofshort covering that was based upon the fa-vourable reports on national income andchain store sales. G.M. announced that it

US CHANGE IN BUSINESS INVENTORIES


billi

ons

in 1

972

dolla

r

YEARLY: 1900-1940

1900 1907 1914 1921 1928 1935

12

11

10

9

8

7

6

5

4

3

2

1

0

-1

-2

-3

-4

-5

-6

-7

-8


143

would pay a bonus dividend of $2.50 pershare. This meant that on the outstanding17.4 million shares G.M. was paying a re-cord $62,250,000 in dividends. This set arecord for the largest dividend ever paid atone time by any industrial company. G.M.’searnings up to the end of the third quarterwere $193,758,302. Yet, when one looksclosely at the numbers, the auto industrywas not necessarily expanding. InsteadFord’s sales were declining in favour ofG.M. and this prompted the bonus divi-dend.

The New York Stock Exchange hadchanged the rules to allow foreign stocks tobe listed on the Big Board. Many specu-lated that Europeans would scramble tohave their stocks listed. However, the ex-change had imposed the rule that compa-nies must pay dividends and such dividendshad to be paid regularly. To the disappoint-ment of many, by year end only one foreignstock had been listed. the Austrian CreditAnstaliz. Only one other application hadeven been received. The big boom that the

brokerage industry had been fighting forhad laid less than a golden egg. Many Euro-peans are selling their stock on their ownexchanges and did not want to comply withthe requirement to pay a regular dividend.This was another sign that Europe was in-terested in extracting rather than partici-pating in the U.S. markets. A simple littlesubtle sign was again overlooked.

Mergers were continuing to fill the pressfrom every sector of the business commu-nity. Banks were also scrambling to buyother banks. Chase National Bank boughtMutual Bank in Manhattan which becameChase’s twenty-first branch in New York.

It was also during the fourth quarter of1927 that a new Governor to the FederalReserve Board was appointed. Roy Ar-chibald Young announced that the FederalReserve Board had decided that it wouldinstitute some reforms in foreign com-merce financing. He proposed that thebanker’s acceptance on fore ign tradeshould not be duplicated and that only one


144

acceptance should be issued for a singletransaction. Normally one acceptance wasissued to finance the shipment of goods toa foreign nation and a second was issued tofinance the distribution of goods into thetrade channels. Nearly $1 billion worth ofsuch acceptances were in the U.S. marketsand it was the Federal Reserve’s decisionthat the second acceptance should be usedto retire the first. Thereby the Fed imposedsome additional constraints upon U.S. ex-ports which would later serve as anotherofficial intervention to hampered U.S.overseas trade. The Federal ReserveBanks held less than a fourth of such accep-tances. Of the outstanding $1 billion infinancing required for U.S. exports theFed’s holdings combined through allbranches averaged only $244 million at theend of 1927 and now it sought to makethings a little more difficult once again forAmerican business interests in favour ofEurope.

The Secretary of the Treasury’s report forthe fiscal year ending June 30, 1927 wasreleased during the first week in December,

and it illustrated this domestic problem. Itshowed that the value of crops had declinedfrom $12.7 million to $12 million whencompared to 1926. Foreign loans were up$1.8 billion over 1926. Exports were stillrising through the first half of the year, gain-ing $4.9 billion compared to imports whichwere up $4.3 billion, illustrating a small gainof $600 million. However, U.S. exports onan adjusted basis had peaked during 1925,dropped 24% during 1926 and in 1927posted merely a 1.6% gain over 1926.

In December, the dollar declined to suchan extent that it was cheaper to pay forimports in gold rather than currency. Thepound par value was $4.8665 and it closedthe year at $4.8828. The Dutch guilder ral-lied to 40.45 cents, which was also above itspar value of 40.20. In December alone, thefirst shipment in gold to the Dutch was $4million.

Meanwhile the value of seats on the ex-changes throughout the United States hadcontinued to set records. Seats on theNYSE traded at $305,000, the N.Y. Curb


145

Exchange $65,000, Chicago $16,500, SanFrancisco $80,000; and in the commodities,a Chicago Board of Trade seat sold for$10,000.

The business sector had continued to ex-pand throughout 1927 but primarily in thedomestic retail sector. J.C.Penny opened its500th store in 1927 and the two- millionthEureka vacuum cleaner was sold. Lind-bergh crossed the Atlantic, landed in Parisand was then welcomed home in the styleof our first astronauts. Meanwhile the Hol-land Tunnel was opened in New York City.America had continued to prosper and itsinnovation was still the leading edge whichbrought the iron lung, transatlantic tele-phone service, the television and the photo-electric cell. Remington Rand was formedand Wonder Bread and homogenized milkwere introduced, all during this eventfulyear, 1927.


146

The year 1928 began with a declining dol-lar and a rising bond market. Against

the British pound, the dollar had declinedby 2 cents between July 1927 and January1928. The pound continued to press higherinto March, reaching $4.88 which was now2 cents above the gold standard par valueand 3 cents above the July 1927 level. Thevast majority of bond issues had been deci-sively of foreign origin. The dollar’s declinewas largely due to central bank interven-tion.

Many a story of shoeshine boys tradingstocks is typical of the type of atmospherewe associate with the raging bull market ofthe 1920s. This is not, however, a fair rep-resentation of the years prior to 1928 and isat best an isolated exaggeration of the 1928to 1929 period. As we have illustrated bypouring through the examples on month-by-month basis, the majority of press com-mentary was bearish on the stock market upuntil this point in time. Advertising cam-paigns had been plastered all over the placefrom billboards to newspapers promotingthe bond market as the "safe" investment

and stocks as the unsafe, "speculative" ven-ture.

But a turning point had at last arrived.From 1928 onward, the bonds would col-lapse and the stock market would soar torecord highs more than t r ip le thoseachieved back in 1919. This dramatic eventin itself is again something which would beinconceivable to the modern day analyst.Nonetheless, it was real and it stands as adefinitive witness that bonds and stocks DONOT always trade in the same direction.The causes would be even more perplexingand perhaps not fully understood until asimilar situation eventually unfolds during1986 to 1987.

During January, the stock market pushedabove the December 1927 high, but at theend of the month it finished below the 200level. The bond market was unable to re-main above the 1927 high and began totrade in a sideways pattern, yet still re-mained appreciably above 99. The rail-roads fell a bit lower closing January below138.

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

nd

MONTHLY: 1928


4.88

4.875

4.87

4.865

4.86

4.855

4.85

4.845

4.84


147

Then in early February, alarmed at thecash outflow to overseas and the abruptdecline in the dollar, the various FederalReserve branches began to raise the dis-count rate. No official explanation was of-fered by the Fed. Chicago and Richmondraised their rates from 3.5% to 4%. Sud-denly, New York was forced to concede thattheir intervention and attempted manipu-lation of the dollar and interest rates hadtouched off a serious drain on U.S. reserves.San Francisco and Minneapolis also fol-lowed suit. in the February 13, 1928 editionof Time magazine, the commentary on thesituation was as follows:

"One effect of the rate changes forecast byfinancial commentators was that stock mar-ket quotations would fall sharply because

market operators would find money tooexpensive to borrow. That did not happenappreciably last week. Another prognosti-cation was that banks would make greaterefforts than in the past few months to losemoney to commercial and industrial or-ganizations. Nor did that develop notice-ably last week."

Here we find that the fundamental ana-lysts began to take on a form more com-monly employed today. After the oldfundamental that lower rates implied de-pression failed to work and the stock mar-ket rallied, those who had been bearish allalong claimed that the market was going upbecause money was so cheap and that thebig operators could afford to hold largerpositions. Yet the claim that banks wouldin turn lend more directly into the industrialsector rather than for speculation, therebystimulating the industrial expansion, hadanother side which could be interpreted asbeing bullish. If the future expectations ofearnings would rise, this was also a positivereason why solid investors would be at-tracted to the market rather than purelyleverage speculators who were more inter-est rate sensitive. It was clear that the fun-damentalists were totally confused by themarket, which was accurately pointed outby Time magazine. These are the very sametype of analysts who have survived today,and we will see why when we reach theperiod of the famous crash.

Some people began to point to the fewcompanies which were turning up losses for1927 or at least a decline in earnings whencompared to 1926. Dodge Brothers earned$14,830,475 in 1927 co m p ar e d t o$31,471,415 in 1926. Gabriel Snubbersturned in $960,330 for 1927 compared to$1,033,630 for 1926. The Presidentpromptly pointed out that sales were down22% yet their earnings were off only 7%.


148

Continental Banking Corp. showed 1927earnings of $5.5 million compared to $6.5million for 1926. Even U.S. Steel turned inlower earnings for 1927 of $164 millioncompared to $199 million the previousyear.

There were some definite losses due toforeign competition. Time magazine re-ported this little note about the textile in-dustry: "New England has lost its monopolyof the textile industry, for factories havegrown under favorable conditions in NorthCarolina, South Carolina and Virginia.Then too, the Yankee is perhaps less thrifty.Some of his sons and grandsons have pre-ferred golf sticks to spindles. Others havesold the old factory to absentee owners inManhattan."

There had been a slowly shifting processin various industries as the South began totake the lead in textiles. Foreign competi-tion was also becoming a concern of manybut, then again, concern over financialproblems in France began to make many

think twice about the huge offerings of for-eign bonds.

The import/export figures for the UnitedStates clearly illustrated the trade surpluswith Europe was still sharply lower from1925 levels. The drastic 24.3% decline of1926 was improved by 1.6% during 1927.The effects upon the U.S. industry werevaried, showing the most serious affiliationupon textiles, chemicals and portions of rawindustrial manufacture.

Toward the end of February, additionalearnings reports for 1927 started to slowlycome out. Coca-Cola reported sales of $8million a day! Earnings were at recordhighs, reaching $19.4 million for 1927 com-pared to $18.4 million for 1926. ContinentalCan reported earnings for 1927 of $4.4 mil-lion compared to $3.7 for 1926. CanadaDry Ginger Ale, Inc. posted 1927 earningsof $2.3 million compared to only $1.7 theprevious year. The consumer orientedcompanies were doing better, as well as theluxury industries including diamonds andfurs.


149

The foreign bond issues were not goingaway. The largest issue came again fromAustralia, which was estimated to be nearly$75 million. This would be the eleventhbond issue offered in the U.S. market at5%, expecting to sell at 98.

The U.S. had lifted its ban on FrenchIndustrial bonds being offered in the U.S.In February 1928, a $10.75 million bondissue for the Paris-Orleans Railroad Co.was offered at 5.5%. Analysts had expectedthat the French would have to pay 6-6.5%to float a bond issue in the States. There-fore, the bankers threw everyone a curveball by placing them out at 5.5%. This ledto speculation that perhaps things were notso bad in France and that the bankers mightknow something that the rest of the worldwas still in the dark about. They also notedthat this bond issue was replacement for a7.6% issue which had been recalled. Theysuspected that perhaps other French bondsmight be recalled and offered again at aneven lower rate. The issue was bought upin less than two days. The total outstanding

French bonds on the U .S. market hadreached $500 million.

The dollar continued to decline into earlyMarch and, in fact, within weeks after theFrench bond issue, the dollar reached itslowest point after the central bank inter-vention. The speculation that rates mightcontinue to drop despite the recent rise inthe discount rate proved to be false, leavingthe majority buying bonds right at the high.

The city of Baltimore conducted an ex-periment to ascertain what the rate of un-employed persons might be. They sentpolicemen around the city on a door-to-door campaign to calculate exactly howmany unemployed lived in Baltimore.They were instructed to leave out the"tramps, beggars, gamblers and thieves." InNew York State, it was reported that 20,000persons were unemployed, the largestamount since 1921.

The Labor Bureau Inc. reported that 4million persons were unemployed through-out the United States. Jacob S. Coxey, who


150

had led a march of unemployed from Ohioto Washington, claimed that 25% of thepopulation lacked a job. The "Magazine ofBusiness" reported in its February 1928 edi-tion that for every 100 persons who wereunemployed in 1921, when unemploymentwas regarded to be its highest, 122 now wereseeking jobs in 1928.

There is no doubt that 1927 brought aslowdown in production in many sectorsincluding steel. This figure of 25% perhapssounds a bit exaggerated. However, cur-rent unemployment figures are heavily dis-counted for all sorts of various reasons suchas minor disabilities, where in fact even aman with one arm sought some kind ofemployment in those days. Therefore,comparing current rates of unemploymentwith those that existed in the 1920s is likecomparing apples and coal.

The month of February brought with it avery sharp break in the railroad stocks. Af-ter closing 1927 above 140, February fell tounder 133. The bonds moved sideways butslightly to the downside, yet remained still

above 99. The industrials, which had closed1927 out above the 200 level, now pene-trated the January low falling to 192.

The February 27, 1928 edition of Timemagazine covered the event with the fol-lowing commentary:

"TICKER LIGHTENING"

"Last week’s violent and sudden break inprices on the New York Stock Exchange,with unprecedented volume of transactionsduring the last hour of the trading week,brought to speculators’ memories the timehonored adage: ‘When a big market breaksbadly on good news it is a bear market;when a big market rises sharply on bad newsit is a bull market.’

"Friday’s nose-dive was nothing short ofshocking to the most hardened ticker-tapereaders. Saturday’s pace of selling wasequally alarming, especially from 11 o’clockuntil noon. The ticker stamped out ‘GoodNight’ at 12:35, despite use of the new ab-breviated symbols which normally keep it


151

within one minute of the execution of or-ders on the floor of the Exchange. In onehour 1,100,000 shares changed hands.

"The items of good news to which themarket reacted were:

1) Increased car loadings.2) Best financial statements ever issued by the General Motors Corp., the N.Y. Central, The Pennsylvania Railroads.3) Decrease in broker’s loans.4) First dividend in fourteen years to New Haven Railroad stockholders.5) increased bookings of U.S. Steel Corp. orders with an operating ratio of 90% of capacity.6) indications of a general speeding up of automotive industry to catch spring trade.

"Against these favorable influences weresome unfavorable items:

1) Spotty trade.2) Unsatisfactory corporate reports, generally.

3) Further cut in oil prices.4) increase of Unemployment in large centers.5) Uncertainties in many commercial directions.

"Two classic explanations were offered forlast week’s break:

"First: popular speculative Wall Street hasgot in the habit of judging the trade situ-ation by the stock market rather than judg-ing the stock market by the manifest trendof trade. Hence, confusion of cause andeffect, resultant consciousness of error,hasty attempt at correction.

"Second: deliberate initiation of liquida-tion by institutions and powerful individu-als who carry their stocks through a blow ifthey care to but who have decided after duereflection that the level of stock prices is outof line.

"Neither explanation admits the possibil-ity of the existence of an underlying weak-


152

ness of any degree of gravity. Obstinategamblers for the rise may have barked theirshins. Or that undefined but still not mythi-cal group of forces known as ’the largestinterests,’ the insiders of popular legendmay have put the brakes on inflation. Theonly disquieting symptom last week was thepace at the finish. It cannot be accuratelydescribed for want of clear financial termi-nology. If stockbrokers had a sort ofBeaufort’s scale (a series of numbers from

0 to 12 ) such as miners use to describe windvelocity, it might be said that the weekpassed from the strong wind of weaknessthrough the gale of heavy liquidation to thestorm of drastic reaction. But at no mo-ment was hurricane force recorded. Hurri-cane weather, in finance, is panic, of whichstate the ticker pulse gave not a suggestion."

The old adage, referred to by Time maga-zine, is quite interesting. If a market breakson good news it must be a bear market andif a market rallies on bad news it must be abull market. It is also interesting that justas soon as the first sign of a fast market tothe downside takes place those famouswords "bear market" appeared. The correc-tion which took place during February interms of price was not much. In total on theaverage for the industrials it was a mere 5%.The railroads displayed a correction ofnearly 10%. This was perhaps a sign thatthe age of the railroads was coming to anend. It would have a life of perhaps anotheryear, but from here on out it would take aback seat to the industrials. In the future,the railroads would become the Dow Trans-portation Index which eventually took ashabby second place. But the technical im-portance is that the corrections in the railswere always more pronounced when com-pared to the industrials. This is a leadingindication and a significant factor whichshould be remembered.

The commodities were also trading a bitlower at this time. However, over at theChicago Board of Trade, wheat jumped upfrom 2.75 cents to 3.375 cents on a rumourthat there was a big buyer in cash wheat tothe tune of 8 million bushels. The rumoursuggested that the buyer was Russia. Whenall the dust began to settle, it turned out thatit wasn’t 8,000,000 bushels, but only 8,000and it wasn’t wheat but instead hops. The


153


154


155

buyer wasn’t Russia but Germany. None-theless, the wheat traders had a good time.

Over in the Rubber Exchange, back inManhattan, the prices were in a state ofpanic. Down and dirty the price of rubberfell to an all-time low on the two-year oldExchange. The volume on the exchangehad surpassed all previous records forweeks wrapped up in the course of fourtrading days. A telegram from London be-gan the onslaught. The news was that theBritish "might" let the restricted rubber pro-duction in Ceylon, Malay States and StraitsSettlements become "inoperative" afterMay 1st. The seats on the exchange dou-bled as one was sold for $6,600. The newsitself had come from the then Premier Stan-ley Baldwin. By the time London openedthe next day, the huge rubber king in Brit-ain, Arthur A. Baumann, suffered a 7 mil-lion pound sterling loss and publicly stated:"10 Downing Street is really unfit to governthe Empire."

Trade with Russia was beginning to bequite impressive. At this point in time itwas estimated to be $100 million annually.However, during February 1928, Russiahad exported gold to the United States forthe first time. It sat idle in the vaults atChase National Bank and at the EquitableTrust Co., losing $700 a day in interest whileWashington decided what to do with it. TheUnited States had outlawed Russian goldsince the Revolution. Just the previousmonth, the Secretary of State ruled thatChase could not cash any coupons on theRussian Soviet Railroad bond issue. Butthen President Coolidge ruled that Sovietgold exports to the United States weremerely in payment for trade purchases andordered that the gold be delivered to themint and struck into coins.

The markets began to recover during Feb-ruary as more earnings reports began to hitWall Street. RCA released their 1927 state-ment showing an $11.7 million profit com-pared to $7.3 million for the previous year.Packard Motor Co. reported an estimated$10 million in earnings for the last sixmonths compared to $7.9 million for thesame period in the previous year. AT&Treported earnings of $166 million com-pared to $155 million the previous year.Still not all reports were profitable. Na-tional Lead Co. (Dutch Boy Paints) re-ported $4.9 million in earnings for 1927compared to $9.0 million for 1926. Someindustries were stagnant such as UnitedDrug Co. (Rexall), reporting $8.3 millioncompared to $8.8 million for the previousyear.

The fixation with unemployment was notover. In March it was reported that thenumber of jobless climbed to 5 million. Cit-ies began to report unemployment figures.


156

US CIVIL WORK FORCE?POPULATIONcomparison study rate of change

1900 1902 1904 1906 1908 1910 12 1914 1916 1918 1920 1922 1924 1926 1928

0.08

0.07

0.06

0.05

0.04

0.03

0.02

0.01

0

-0.01

-0.02

-0.03

-0.04

-0.05

-0.06

civil work force population


157


158

Baltimore, which had started the practice ofsending police knocking on a door-to-doorjourney, reported 42.5% unemployed, thehighest in the nation. Next in line wasCleveland, reporting 33.8%. Detroit re-ported 32.3%, Philadelphia 30.6%, Buffalo26.7%, Omaha 26% and New York 24.2%.Chicago reported the lowest unemploy-ment rate of 7.8%.

Confusion was surrounding the issue.Why were so many people unemployed?The Secretary of Labor, James Davis,stated: "You can make all the boots andshoes needed annually in America in aboutsix months and you can blow all the windowglass needed in America in seventeen days.You can dig all the coal necessary in sixmonths with the men now in the industry.Because of our increase in population in thelast eight or ten years it now should take 140men to supply the needs of the country

where 100 could do so. Instead of that andin spite of our having 20,000,000 more peo-ple, the needs of the country are fully sup-plied with 7% fewer workers than weneeded in 1919."

There were several events which hadtaken place to cause such a vast unemploy-ment problem. First, after the ravages ofWorld War I had settled upon Europe,many people set out to start a new life onthe "streets paved in gold" which were ru-moured to exist in the United States. Therewas a huge increase in population withinthe United States. This factor, combinedwith the improvements within the assemblyline methods invented by Ford, is why jobswere being displaced to some extent. If wewere to take the steady population, net ofimmigrants, we would find that unemploy-ment was about 7% below the peak of 1919.

The U.S. was substantially behind thetimes in collecting economic data. Therewas no regular agency that kept track ofunemployment. This sudden exposure tothe unemployment figures which were be-ing collected startled the stock market inFebruary and sparked continued concernthereafter. In early March, the U.S. Com-missioner, E. Stewart, became alarmed andpublicly made an announcement: "Everymachine that is built to do the work of fourmen throws three out of work. Of course,new industries are created and productionincreases to absorb part of the surplus laborbut sooner or later we will reach the satura-tion point. Whether we have reached thatpoint now will be determined by the middleof April, and if we have reached it, there isonly one solution, shorter working hours.Anything else will be suicidal." This was nolight public statement. But for somestrange reason, the market paused and thenrallied sharply, as March closed the month


159

on the industrials at nearly 211, well abovethe 1927 high.

During mid-March the rally began. In theMarch 19 edition of Time magazine, it wasreported as follows:

"Last week was perhaps the most remark-able speculative week in modern history ofthe New York Stock Exchange. Specula-tive, because there were no political or geo-logical events like the declaration of War in1914, or the San Francisco earthquake of1906. Modern, because in older days (up to1907), the trading was small in volume andalmost ent ire ly between professionalspeculators, consequently subject to moresudden and violent whims than the tradingof today, which affects the fortune of per-haps 7,000,000 U.S. security owners.

"Long will it be remembered in WallStreet that last week’s unparalleled bullspurt came immediately after a dull bearmarket, precipitated by a sudden break.Equally long will market historians discussthe reason for last week’s phenomenalspurt. The principal reason was the unex-pected action of the officers and directorsof the General Motors Corporation in pur-chasing 200 000 shares of their own stock inthe open market for their own account.

"The result was not only a week of recordvolume - 16,278,900 shares between Mon-day morning and Saturday noon - but arecord week in the quality of the stocks thatwent up under the leadership of GeneralMotors. Only the best stocks gained.

"General Motors managers acted againstthe pessimism of the Federal Reserve Bank.Why? Because their annual report for 1927,published last week, was far and away themost encouraging document which the fi-nancial year had so far brought forth. As-

sets of $1.09 billion, an increase of $77 mil-lion over 1926 earnings of $235 million, thelargest peace-time result ever achieved bya corporation; total business of $1.2 billion- these figures stimulated Wall Street specu-lators and investors everywhere, and theybought 2,431,500 shares of General Motorsstock in five and one-half days, lifting theprice of the stock from $144 3/4 to a highpoint of $161. There are 17,400,000, sharesof General Motors stock outstanding. Lastweek they increased $282 million in value."

The market literally soared beyond thebelief of what everyone had thought waseven possible. In the midst of bearish state-ments of doom centering around the newlyaccounted unemployment figures and inthe face of a hike in the discount rate, themarket rallied more in one week than it hadever done before. The bonds fell to a newlow for the year, testing the 9900 level, butmanaged to rally for the end of the monthin March, establishing the highest monthlyclosing for the year 1928.


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There were all sorts of rumours flyingaround. There was talk of bull pools butmostly of bear pools caught short. Onesuch story was that of a huge short positionin RCA. A rumour began to circulate thata corner in RCA had been established de-spite shorts who had run in and sold 350,000

shares. It was known that of the 1,155,400shares of RCA, almost the entire lot wasowned by General Electric, WestinghouseElectric, National Bank of Pittsburgh andthe Fisher Brothers of Detroit ("Body byFisher"). Nevertheless, the shorts had soldnearly one third of the outstanding issues onthe unemployment news. In one day, theydrove RCA down from the previous day’sclose at $121 1/4 to $85 1/4. When GeneralMotors began buying their own shares, thewhole market went nuts. RCA opened thefollowing day at $120 1/2 and shorts wentcrazy. A buying stampede of unprece-dented proportions unfolded. RCA ex-ploded upward within a matter of minutes,reaching 138 1/2, which is where the markethad closed the previous day. The day endedby registering 3,000,100 shares traded intotal; which established an all-time recordfor the entire 130 years in New York StockExchange history. The press called the rallythe "Ides of March Terror." When the finalcount in volume came out the followingweek, it revealed more than what Timemagazine had originally reported. The fi-nal figure was 20.5 million odd shares in-cluded. Asset traded that week at $315,000.

Oil stocks were not doing very well. Theoil prices continued to decline under highproduction pressure and price wars. PhilipsPetroleum, for example, released their an-nual report during March of 1928. It re-vealed how ser ious the problem hadbecome. Their 1927 earnings were $4.9 mil-lion against $21.4 million for the previousyear. The coal industry was picking up. Pittsburgh Coal reported 1927 earnings of$1.8 million against 1926 losses of $2.1 mil-lion. The airplane industry was still doingwell as displayed by the March 1928 releaseof the Curtis Aeroplane & Motor Co., Inc.which produced 1927 earnings of $794,148against $413,317 for 1926.


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International Harvester reported 1927earnings that March of $23.3 million against$22.6 million for 1926. Studebaker showedan 8.5% decline from 1926 earnings. An-other turnaround was the Amer icanWoolen Co. with 1927 earnings of $2.5 mil-lion against a 1926 loss of $2.1 million.Quite impressive.

Obviously, the reports were mixed butoverall the reports released during Marchwere more turnaround surprises than dis-appointments. Only rubber and oil, bothwith huge overproduction problems, hadbeen expected. Therefore, with G .M.showing an impressive report, wool and tex-tile turning around and airplanes still grow-ing, there was a lot of good news despite thedepressive unemployment figures and thehike in the discount rate.

The rally literally broke all records andcontinued straight into the end of themonth. March finally closed at all-time re-cord highs for the industrials. The rails ral-lied sharply from the February low of justunder the 133 level back up to 142, closingslightly above 141, but they did not exceedthe 1927 high which was nearly 145. Againthe industrials led the way. The bonds ral-lied, closing on the high as well, but it was aweak rally at that.

Perhaps the events are better describedby Time magazine, which commented onthe affairs in its April 2, 1928 edition.

"THE PUBLIC INVITED"

"Last week, only one member was carriedfrom the floor of the New York Stock Ex-change in a state of complete collapse. Apetition circulated among members for athree day holiday, Good Friday, the inter-vening Saturday and Easter Monday, ap-peared to find more brokers fascinated by

the profits of 4,000,000 share sessions thanworried by the danger of physical ruin.Every ‘record’ of any shape or descriptionwas broken and rebroken.

"The explanation is simple. The ‘public’had finally come in, tardily, clumsily, ‘at thetop,’ as always, with the greatest reservoirof cash of all, compared to which WallStreet’s organized money force is small. Itastonished nobody, because 7,000 tickersare now hypnotizing greedy eyes in 40states, leaving scarcely a middle-sized townfrom Maine to California where citizensmay not actually see their savings bankwithdrawals dance past their giddy eyes instrange, cryptic abbreviations three min-utes after passing their checks to the bro-ker."

If we go back and read that article care-fully, we will note a very interesting com-ment. It called the public tardy and clumsyand waiting to buy "at the top, as always."They assumed along with everyone else thatthe market had surely peaked this time.


162

They forgot that the public, as we reportedearlier in prior years, bought huge amountsof stocks at half this level and for cash!There was never any evidence of massivepublic selling. The public which hadbought for the most part back in 1924 wasstill long the market. This March high didnot prove to be the top. Short interest againbegan to build. April made a new high,settled back a little, and did close below theMarch high at the end of April. Shorts weredefinitely foaming at the mouth and readyto take what everyone assumed was thesuckers’ long positions down for a ride.When all was said and done, the entiremonth of March had set a record with84,987,834 shares traded. The shorts wereconvinced that the top was in place.

However, the March rally had taken placesuddenly and coincided with the low in thedollar. The French stock market peaked inFebruary and began to drop sharply inMarch. In Britain, their stock market

peaked in late January and fell 12% intoMarch. In the Netherlands, their marketpeaked in February and the Belgian mar-

ket had also rallied back, reaching its majorpeak for 1928 during February as well. TheU.S. stock market had responded to a shiftin international investment from Europe aswell as the major low in the dollar itself.

At the beginning of May, the St. Louis,R ichmond and M inneapo lis d ist r ictbranches of the Federal Reserve raisedtheir discount rates to 4.5% from 4%. Theothers were now expected to follow suitshortly. Despite this event, the market heldonce again and a seat on the New YorkStock Exchange traded at $395,000. Be-tween March 9 and April 23, each of the 18trading days exceeded 3,000,000 share dayswith the highest volume on March 30 reach-ing 4,759,300 shares that day alone. Seatson the other exchanges had risen dramati-

cally as well. The New York Curb traded at$65,000, Boston at $18,000, Los Angeles at$35,000, San Francisco $125,000, Philadel-phia at $11,500 and even the Chicago Boardof Trade reached $9,000.

During April, while the industrials hadmade a new high and then retreated tofinish the month below the height of the


163

"Ides of March Terror," the rails advanced,tested the 1927 high and closed well abovethe high established during March. Al-though the April railroad high was notabove that established in 1927, it was thehighest monthly closing achieved. Thebonds fell sharply dipping below the 99level for the first time in 1928, barely crawl-ing back up to settle slightly above 99 at theend of April.

It was about this time that further foreignbond offerings were flooding the market.Britain and Ireland offered another $10million War Bond issue. Although it wastaken up in the market the saturation levelwas obviously making its presence felt. Theso-called clumsy "public" was shifting frombonds to stocks while the so-called profes-sionals were buying the bonds and sellingthe stocks in anticipation of an imminentcollapse in stock prices. Previously, bondshad always held up when stocks collapsedand this had been a popular "professional"spread. But now the so-called nonprofes-sionals were joined by foreign buyers firm-

ing the market and preparing for substan-tially higher levels in the future.

There was a noted and historic change inbanking taking place at this precise point intime. Banks up to this period had paidinterest only on a monthly, quarterly orsemiannual basis. If a depositor had towithdraw his funds before the prescribeddate when interest was to be paid, he for-feited all interest even if it was one dayearly. During the second week in May theEmigrant Industrial Savings Bank in Man-hattan announced that it was the first bankthat would pay interest on a daily basis. Itacknowledged that on some very small ac-counts its bookkeeping costs might be morethan its profits, but it stated that over its 77years of history it had learned that smallaccounts often turned into very big ac-counts.

The National City Bank in Manhattantried to counteract this competition with anannouncement that it would lend between$50 and $1,000 to any individual on what itcalled "personal" loans provided that the


164

person was employed. The rate of interestto be charged was 6%. All loans were to befor one year only. The personal loans wereunder the stipulation that only responsible,employed persons without collateral mayapply, provided the note was endorsed bytwo respectable friends. This was not actu-ally a first. The first such bank to issue"personal" loans was in Norfolk, Virginia.The concept was introduced by an attorneynamed Arthur J. Morris. The loans were tobe paid on monthly installments. Pre-viously, the merchants were the only lend-ers on a personal basis but the going ratewas normally $20, quite similar to the tradi-tionally higher rates imposed by creditcards today.

In May, many reports began to hit thepress with the first quarterly earnings in1928. Again AT&T showed a gain of 8%above 1927. General Motors was amongthe most impressive again, displaying earn-ings of $69.4 million for the first quartercompared to $52.5 million for the sameperiod in 1927. This was not necessarilyreflective of the entire auto industry be-

cause G.M. continued to carve out a largershare of the marketplace. Some rails weremixed with Pennsylvania R.R. showing adecline in earnings while the Union Pacificwas posting a 10% gain. Coca-Cola wasposting a 10% gain; General Cigar, a 50%decline; Hudson Motors, a 5% gain; andPackard posted 1928 first quarterly earn-ings of $5.7 million compared to $2.0 mil-lion in 1927. Clearly, the auto industry,which had saved the economy back in 1921and begun this age of prosperity, continuedto turn in overall good results.

May brought with it a lot more than mereflowers. The bonds tanked, falling nearly afull point from above 99 to barely holding98. The industrials soared to new recordhighs straight up passing the 220 mark.Even the rails at last exceeded the 1927 highby reaching above 147, but they fell back toclose just above 144.

The market turned toward the motors andthe aviation stocks. Suddenly airplanescame into favour. Time magazine reported


165

on this newly favoured industry on May 28as follows:

"Thousands of small speculators, who havebeen largely responsible for the threemonths hubbub in Wall Street, were lastweek seized with the same idea. Each ofthem wanted to stow away, or play with, afew shares of air stock. True enough theyhad played intermittently with air stockssince the Paris flight of Charles AugustusLindbergh, but never as they did last week."

Much of this had to do with a few newissues in this industry that underwriters hadplaced at $12.50 but that soared on the CurbExchange to $25 and rose even further to$30 in a single day. One of the best knownwas Wright (Wright Brothers). They wereproducing about 100 airplane motors amonth and announced an extra dividend.The stock was selling at $214. They offeredstockholders the right to buy one share for$100 for every five shares of stock owned.The stock jumped immediately to $245 onthe news. On the day before Lindberghcrossed the Atlantic, this stock had closed

at $28.50. Curtiss, famous for the CurtissJenny, was selling for $21.75 before theLindbergh flight. On this air stock buyingspree, Curtiss ran up to $192.75.

Time magazine commented on the floortrading activity for early May as follows:

"MADNESS. The frenzy of trading on theNew York Stock Exchange last week sur-passed all previous spectacles. From thefloor a jubilant howling roared; brokersmilled around; pages and messengers dou-bled around huddles of bidding brokers;brokers chanted a litany of bids and asks ateach other, and sweated like the marchingmonks in Tannhauser."

The week set another new record withWednesday trading 4,820,840 shares. Thetotal for the week was 21,352,200 shares.But something strange had also taken place.Although Wednesday had set a new record,it also experienced a sharp panic sell offwhich was shor t-lived. Many stockscracked, falling from 5 to 40 points. Butsome of the curious noticed that stocks like


Rat

e of

Inte

rest

in %

1928

J

5

4

3

2

1

0


166

AT&T didn’t decline, but instead they ral-lied to new highs when others were fallingand looking for some sign of support.

The exchange closed that Saturday andeven shortened the days. Normally themarket traded from 10 am to 3 pm, but itwas ordered to close by the governors at 2pm each day that week. One of the morefamous seers who was often quoted in thosedays was the well-known economist Colo-nel Leonard Porter Ayres of the ClevelandTrust. He came out and made quite a seri-ous statement which was still reflective of

the "professional" trader of the day. Hesaid:

"This wave of speculation has extended toall parts of the country, and drawn in allparts of the country, and drawn in all classesof population. Increasing thousands offirst-time speculators are watching their pa-per profits mount, and are concluding thatanyone who works for a living is a boob. Itis almost literally true that great waves ofspeculation like the present one cannot bekilled off; they have to commit suicide.How much longer this market may run is asimpossible to predict as was the duration of


167


168


169

the Florida boom and for similar reasons.The leading stocks in this market, taken asa group, now yield in dividends about halfas much as it costs to carry them on margin.Speculators think they are discounting thefuture earnings of the prosperous compa-nies. In the bull markets of the past 30 yearsthe prices of groups of stocks have repeat-edly been carried up to levels quite out ofrelationship to their earnings or their divi-dends. This has happened with the expresscompanies, the rails, the coppers, the oils,and the equipments. The records show thatthese extreme price advances have always

turned out to be based on belated recogni-tions of past performances rather than onprophetic appreciation of future possibili-ties."

The public was not concerned so muchwith margin. Figures in historical studiesrevealed that most of the buying again wasfor cash which was being funded by thewithdrawal from the bond markets. Con-cern was building over many areas. The factthat the discount rate was raised in May to4.5% by the New York Fed did not deter thebuyers in the stock market.


170

Why was the Fed raising the discount rateso fast after lowering so far? The Fed’shelping hand to lower the discount rate sothat Europe could attract more neededfunds backfired. Since September 1927gold flowed out of the U.S. reserves likewater held in a bottle with a hole in thebottom. Between September and May,$494 million in gold bullion left for Europe.This was in itself an historic drain. Thismeant that cash for lending was tight andthe Fed, after artificially lowering the dis-count rate to help Europe, forced a declinein the dollar which it never expected. Nowthe Fed had to raise the discount rate fasterthan they had ever done in prior years andfaster than they had brought it down. Dur-ing a single week in May, France drew $13million from the U.S. reserves and as soonas that left on the boat another $12 millionwas set aside for their account. The totalgold reserves dropped from $2,690,052,000to $2,640,809,000 in one week. That was adecline of nearly $50 million dollars. Even

the N.Y. Fed was forced to raise its rate to4.5%.

The foreign markets were very activethemselves. Curiously enough, the Britishstock market peaked at this time, coincid-ing with the low in the dollar and the highin the pound. From the April high, theLondon market continued to fall 15% intoJuly, rallied back up by 5%, remained side-ways until January 1929, and fell straightdown from the 175 level to 120 by the endof 1929. Therefore, this upturn in the U.S.stock market began to pick up steam as thedollar rose against the pound into 1929.

The German stock market peaked duringJune. Sweden peaked back in 1927 at 175,fell to 140, and rallied back to 175 to createa double top during September 1928 atabout 170. Italy peaked back in 1926, fellsharply, and then rallied for a test of thehighs during 1928. Belgium peaked pre-cisely during May 1928. Japan had been ina downtrend since 1925. The Netherlandsmoved largely sideways, finally topping


171

during the first quarter of 1929. Switzer-land’s market peaked during September1928. All foreign stock markets that movedhigher beyond the May 1928 point did so ata very slow pace. Only France soaredstraight up, but this was solely due to thefact that the franc was devalued substan-tially during this period.

By the end of May, 1928, all the FederalReserve district branches had raised theirdiscount rates to 4.5% with the exception ofSan Francisco and Kansas City. The callmoney rate rose to 6.5% for the first timesince July, 1921. The exchanges were stillvery much unsettled by the huge volume oftrading. Clients complained about theshort hours of trading and the five-day trad-ing week so the New York Stock Exchangeresumed a six-day week and a full day goinginto June. The Chicago Board of Tradetook a vote of 795 for and 116 against be-ginning to trade stocks. The Chicago StockExchange complained bitterly. In Los An-geles, the new Curb Exchange was sched-u led to open t rad ing in June . Timemagazine reported in June that the U.S.

invested $1,000 every second. Theyclaimed that the national wealth was $320million and the population was now 117million. And to top matters off, the Equi-table Trust Co. in Manhattan, aggressiveand bent on building business, advertised ina bold and striking way. Their ad stated:"Banks don’t solicit expiring accounts. Es-tablish your banking relationship and yourcredit while conditions are favourable. Nodoctor is anxious to be called in when thepatient is known to be dying. Neither canyou expect a bank to want your accountwhen you are in business trouble. Be sureto establish a profitable connection whenyou are prosperous and in a position tochoose."

Broker loans were rising, which did indi-cate that some speculation had also enteredthe market at this time. But May broughtwith it a top in the railroads and moving intoJune, a sharp correction followed. From arecord high in May nearly reaching 148, therails fell sharply all the way back to under134 in June. It was a one-month correctionwhich was very sharp indeed. The bonds


172

also fell from above 99 in May, crackingslightly below the 97 level, a little more than2 full points.

In the June 25, 1928 edition of Timemagazine, the commentary on the "StockMarket Break" that month was as follows:

"Stock market prices broke last week. Itwas expected. Many causes can be ad-duced. But the chief is the fact that specu-lators had abandoned thought of therelation of security prices to the earnings ofunderlying business ventures. It is inaccu-rate to say that any one security issue startedthe break last week. But if one is to be setup as a black example, it is the Bank of Italy.On the San Francisco and Los Angeles ex-changes Bank of Italy stock broke 160points - from 284.75 to 125. Related issuesacted likewise. Bancitaly dropped 86 points- 195 to 109; Bank of America 120 points -270-150; United Security 80 points - 245 to165. In New York the drops in these issueswere as great. Millions of paper profitsdisappeared. On one day New York StockE xchange brokers handled 5,052,790shares (a record number), New York CurbMarket breakers 1,329,000."

What was it that shook the market sodrastically? Why was it that the bankingstocks led the way down? The answer tothose questions ironically was the worlddebt situation. The collapsing bond marketcast an unsettling air about the exchange.Some people were fleeing from bonds intostocks and professional traders were sellingboth. The bank stocks were the centre ofattraction because they were seen as per-haps the greatest risk.

In the July 23, 1928 edition of Time maga-zine, an excellent article appeared whichsummed the situation up quite nicely. Itexplained a few very important factorswhich we today would find not merely inter-esting but critical, considering the interna-tional debt situation in the 1980s.

"BULL. For four years, Wall Street hasbeen noisier than ever before in its history.It has seen a stream of gold pouring in from


173

abroad. Between 1923 and 1928, the U.S.exported gold worth $500,000,000, but im-ported $1 billion. Each $1 of gold in a bankreserve means a potential $13 credit. Infour years the U.S. in this way alone added$6,500,000,000 to its credit resources. Itcould finance a building boom, a Floridaboom, vast installment selling, new high-ways, new factories. It had enough credit tosupport a continuous bull market withstocks soaring week by week. Through thetwelve Federal Reserve banks it could lendmoney to brokers at 3.5 or 4% swelling thecredit available for speculation. Moneywas easy. Times were good for the traders.

"Money was never so easy as last Septem-ber, when the bull market was in full swing.But in Europe the central banks were introuble. Helpfully, the Federal Reservesought to ease up still further on credit inthe U.S. with the sound idea that higherinterest rates abroad would attract muchneeded funds. It ordered the Chicago Bankto reduce its rediscount rate from 4 to 3.5%.Chicago bankers, led by famed Melvin Al-vah Traylor, head of the powerful First Na-

tional Bank dissented sharply voiced gravewarnings. Unheeding, the Federal Reserveforced its way, helped Europe weather itscrisis.

"BEAR. Banker Traylor’s warnings havebeen remembered in the last few months.Since September, Coolidge prosperity hassuffered many a blow. One by one marketoperators have noted these ominous signs:

1) The stream of gold has turned awayfrom the U.S. In the last year, exports haveexceeded imports by $497,963,400, killingall the gains of the 1924 to 1927 period. InJune, exports reached a record for a singlemonth with $99,932,000.2) Its credit resources already strained by

the movement of gold abroad, the FederalReserve stopped buying government secu-rities, started SELLING them, withdrawingloose money from the market, reducing itscredit reserves still further.3) In spite of this reduction, borrowings

from member banks, largely to finance bro-kers’ loans, climbed to a new high point


174

sin ce 1921, r e ach in g a lm o st t o$1,200,000,000.4) Speculation skyrocketed. Brokers’

lo an s in cr e ase d b y m o r e t h an$1,000,000,000 in twelve months, standinglast week at $4,242,699,000.5) The stock market became nervous,

jumpy, catapulted through a 5,000,000share day, recovered a little, remained un-certain.

"PROGRAM. Determined to stop thespeculative orgy, the Federal Reservestarted to bring the era of easy money to anend. Sale of government securities was thefirst step. Then followed a series of experi-ments with the rediscount rate. New Yorkadvanced from 3.5% to 4% on Feb 3, from4 to 4.5% on May 18. Still the market heldand broker’s loans continued to mount.

"Last week, Chicago took the initiative,jumped the rediscount rate to 5%. ThenNew York, R ichmond, Atlanta did thesame. The market broke at once, repre-sentative stocks averaging a decline of 4.41points, the greatest since the fateful July 30,1914. Du Pont fell 16.5 points; GeneralMotors 8; General E lectric 6.25. Callmoney rose to 7%. Thanks to six monthscampaigning, money at last was tight. At lastBanker Traylor had had his way.

"BETS. Experts foresaw tight moneythroughout the summer, or until member-banks repay some of their debts to the Fed-eral Reserve and brokers’ loans show amarked drop. Col. Leonard Porter Ayres,famed economist of the Cleveland TrustCo., saw the stock market as a ‘great na-tional bet against the continuation of highrates, and since the Federal Reserveauthorities can hardly reverse their presentpolicies until the excessive use of credit forspeculation has been terminated, the deci-sion will probably be against the stock mar-

ket.’ He predicted ‘the end of the Coolidgeprosperity era of five years and a seriousdecline in stock prices before the end of thisyear.’ Banker Traylor, 1927 Cassandra,ventured a snort, a prophecy: ‘There is nomore justification for the prices of a lot ofthese favorite speculative stocks than therewas for $500 an acre for Iowa land in 1920.If there is not a return to sanity we will loseour position of world leadership.’

"MORBID. Stock speculation shouted‘Paternalistic!’ and ‘Mollycoddling!’ Theycried: ‘What business is it of the FederalReserve whether General Motors is at 150or 200?’ Bond houses watched a continuingweakness in their market with foreboding.

"STRONG FLAYED. From Chicagocame angry demand at the Chicago Tribunefor this resignation of Governor BenjaminStrong of the Federal Reserve Bank of N.Y.Declared the Tribune, in I-told-you-sospirit; ‘Stock speculation grows of its ownmomentum, like a snowball. This snowballwas started on its way with the help of Gov.Strong. It was through his influence that theFederal Reserve Bank of Chicago wasforced to lower its rate against the judgmentof Mr. Traylor. Gov. Strong’s participationat the start makes his resignation now im-perative."

The above article, recounted here wordfor word without deletion, sums up the at-mosphere that surrounded that sharp col-lapse in the stock market during June 1928.Clearly the bitterness toward the artificiallowering of the domestic U.S. interest ratesto help financially distressed Europe bringsback memories of the G-5 boys in 1985.

Are there any lessons to be learned? Ob-viously, we will see from here on out that upuntil the G-4 meetings of Benjamin Strong,Governor of the NY Fed, interest rates had


175

CALL MONEY RATE

PE

RC

EN

T

YEARLY: 1927-1932

1927

21

20

19

18

17

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

0


176

remained fairly steady. Was that pressureto drop the discount rate to aid cash flowtoward Europe in the face of a strong dollarthe catalyst for the stock market collapseand the entire 1929 Depression?

From this point onward, interest ratesbegan to rise at a far greater pace than everbefore. Like the snowball effect mentionedin the article in respect to the stock market,the same snowball effect took over in theinterest rate markets as well. The upwardvelocity from this point onward neitherstopped the stock market nor the depres-sion which would eventually engulf theworld.

In the July 30 edition of Time magazine,the front cover story was once again theconflict of Chicago vs. New York. The ac-count illustrates the bad feelings through-out the nation over the huge problems setoff by the G-4 boys of the 1920s.

"Brilliant is the spotlight which playsabout the comings and goings, the doingsand infrequent sayings of Gov. BenjaminStrong of the Federal Reserve Bank of NewYork. All the world knows when he speedsto Europe. All the world watches for hismeeting with the Grand Viziers of interna-tional finance.

Montagu Collet Norman, witty Governorof the Bank of England;

Hjalmar Schacht, stern President of theGerman Reichsbank;

Emile Moreau or Charles Rist of the Bankde France.

"In Washington, a man named Roy A.Young presides day by day over the FederalReserve Board, central authority of thetwelve regional banks. In Chicago, Min-neapolis, Atlanta, sit Governors with asmuch authority as clothes the Governor ofNew York’s bank. But when BenjaminStrong ill receives the foreign chiefs inManhattan, no Wall Streeter thinks of thequiet, unostentatious figure in the Treasury


177

building’s spacious offices. And certainlyno Streeter thinks of such an untraveled,provincial person as a banker in Minneapo-lis or Atlanta or Chicago might be supposedto be.

"So compelling was the prestige of cosmo-politan Gov. Strong that it seemed almostpresumptuous when Chicago bankers ven-tured last fall to challenge the wisdom of hisinternational money-juggling. If wise Gov.Strong, fresh from a meeting of masterminds, thought Chicago should reduce itsrediscount rate from 4 to 3.5% to aid hisEuropean comrades in finance, only badmanners or sheer contrariness could ex-plain Chicago’s dissent. Gov. Strong wascast for the hero’s role in the drama of U.S.money. Obviously, all that remained forChicago was to be the juvenile or the villain.

"Last week, Gov. Strong was again inEurope. And his Manhattan supportersnoted with alarm that Chicago was showingdistinct signs of insubordination, was evenpretending to take the lead in the intricatebusiness of money-Juggling. Boldly, theChicago Reserve Bank recalled its warningsof last fall, pointed to diminishing credit

reserves and wild speculation, jumped itsrediscount rate to 5%. Manhattan, accus-tomed to lead, was forced to follow. Chi-cago’s press openly flayed the absent Gov.Strong; screechingly demanded his resigna-tion.

"Puzzled, irritated, New York bankersasked questions. Who gave provincial Chi-cago the right to criticize internationally-minded Manhattan and its Gov. Strong? InNew York papers, an anonymous bankercharged the regional bankers suffered ‘de-lusions of grandeur.’ And if it came to that,who were these Chicagoans, anyway?"

It is surprising with all this fanfare aboutspeculation and the interest rates that theChicago hike to 5% on the discount rate inJuly 1928 did not send the market to newlows. If we look at the charts, we can clearlysee that the railroads rallied back from theJune low of under 134, nearly reaching 140in July and closing the month above theJune close. The industrials, which hadfallen from 221 to 202 in June, rallied backand closed almost on the high in July near218. The bonds, however, fell from above


178

DUTCH GUILDER

U.S

.Dol

lar

per

Dut

ch G

uild

erMONTHLY: 1928


0.4034

0.4032

0.403

0.4028

0.4026

0.4024

0.4022

0.402

0.4018

0.4016

0.4014

0.4012

0.401

0.4008

0.4006

0.4004

UNEMPLOYMENT

PE

RC

EN

T

Yearly: 1900-1929

1900 1907 1914 1921 1928

12

11

10

9

8

7

6

5

4

3

2

1

0


179

FRENCH FRANCU

.S.D

olla

r pe

r F

renc

h F

ranc

MONTHLY: 1928


0.0393

0.03928

0.03926

0.03924

0.03922

0.0392

0.03918

0.03916

0.03914

0.03912

0.0391

0.03908

0.03906

0.03904

0.03902

0.039

SWISS FRANC

U.S

.Dol

lar

per

Sw

iss

Fra

nc

MONTHLY: 1928


0.1931

0.193

0.1929

0.1928

0.1927

0.1926

0.1925

0.1924


180

9700 to reach their lowest closing for theyear at the end of July under 9600.

July was still marked by mergers and take-overs much like the period during the 1984-1986 era. One of the most importantmergers was in the soap industry that July.The two famous firms were the Colgate Co.and the Palmolive-Peet Co. This mergerwould provide a combined estimated salesfor 1927 of $100 million. The Colgate Co.was originally founded in 1795 and now thismerger would mark a combined effort toattack the giant of the industry, which wasProctor and Gamble with 1927 sales re-ported at $191 million.

Another merger which has lived on in theminds of America today was the merger ofthe Dodge Brothers and the Chrysler Corp.Other events were noted around the nationwith numerous mergers. G.M. announcedrecord earnings once again which helped tosteady the market.

In Chicago, the price of meat was risingsharply. Porterhouse steak rose from 80

cents to 90 cents a pound and sirloins to 45cents. Meat prices were watched withalarm as they could potentially rise to the1920 highs of the World War I era whenporterhouse reached $1 a pound.

The rise of the stock market had definitelybeen accompanied with rising call moneyrates that now traded between 5-10%,which was sharply higher over the 2% lowin prior years. But it is also important tonote that the varying rates where moneywas deposited were a direct cause at thattime of many side effects. For example,commercial bank deposits only paid 2%.Therefore, corporations seeking to investtheir surplus cash were often lured to goodsecurities which yielded 4% to 6% in divi-dends. But a growing practice at that timewas similar to the money-market crisis forthe banks in the 1980s.

Bonds not only fall during periods ofhigher rates, but their popularity declines aswell. This is a normal relationship whichone must keep in mind in the years that willfollow 1986. The stock market of the 1920s


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was now being fueled in an unending circleof funds. Corporations, with rising surpluscash and cash obtained through the sale ofsecurities, were attracted to the call moneymarket much as individuals were attractedto the money-market funds in the early1980s.

Instead of corporate cash being depositedas a normal commercial deposit earningonly 2% at the bank, corporations weredistinctly lending their surplus in the callmoney market where they could obtain 5%to 10% on an overnight basis. Between July1927 and 1928, the frolics of the Fed did notmerely set off a cash flow drain in favour ofEurope, it set off a drain from time depositsinto call money deposits. Call money de-posits rose from $906 million in July 1927to $1.8 billion by July 1928.

Eventually, the Fed and Congress blamedthe rise in call money upon wild specula-tion. Although that argument was perhapstrue to some degree, it was primarily causedby the action of the Fed in the first part. Bydistinctly lowering its discount rate artifi-

cially to lower the dollar and help Europe,it set off a great imbalance among the vary-ing types of interest bearing deposits. Cashnot merely flowed to Europe but those whofeared Europe’s problems found the stockmarket a safe bet. Call money could beliterally "called" out on a moment’s notice.The risk was essentially the bank’s for thebank placed the funds in the call moneymarket upon instruction and for a commis-sion.

Banks were becoming concerned at losingdeposits to Europe and time deposits do-mestically as well. The banks began to warnclients that they were going to raise theircommissions on call money loans. In a sin-gle week late in July, call money depositsleaped a staggering $370 million.

The President of the National City Bankin New York publicly stated: "It is a danger-ous and unhealthy trend." The Vice Presi-dent of Guaranty Trust commented: "Thisis one of the by-products of prosperity withwhich we have not learned to deal." TheCleveland Trust Co. stated: "Clearly a re-


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form is needed in New York banking prac-tice."

The controversy over the varying moneyrates continued into 1929. But for now thebonds weakened as advertisements ap-p e a re d with he ad l ine s: "BACK TOBONDS They Pay In the Long Run." Cor-porate earnings were still rising and thereports adorned the papers day after day.

Then August came onto the scene. Sud-denly the market raged onward in the faceof climbing rates around the nation. TheDow Industrials soared to a new recordhigh straight up in virtually a single breath-less move closing August above 240. Therails rallied smartly but remained below theMay high of nearly 148, closing barelyabove 143. Of course, the bonds did littlemore than hang around a half point rangedesperately trying to remain above the Julylow.

The surge in the stock market and thesurge in call money deposits raised the

blood pressure at banks around the nationas well as at the Fed. Time magazine onceagain reported on the issue in a very precisemanner in its August 13 edition.

"STOCK MARKET"

"Week by week the total of brokers’ loansmounted. Federal Reserve banks led byChicago raised the rediscount rate to 5%.Still the member banks reported that cor-porations and individuals were withdraw-ing deposits and putting their funds on thecall loan market. Last week, U.S. bankerssat down to a serious campaign to end thewholesale diversion of money for specula-tive purposes.

"In Chicago, Federal Reserve directorsdiscussed radical action, a return to theearly system of ‘differential rediscounting’with low rates for agricultural and industrialloans, high rates for loans destined forspeculation. To Manhattan came curly-haired Roy A. Young, Governor of the Fed-eral Reserve Board, ostensibly on a tour ofinspection. But bankers noted his arrival


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coinciding with the issuance of a seriouswarning by the Federal Reserve Bank ofNew York. Banks were ‘overloaned.’ Thediscrepancy between deposits and loanswas becoming too great.

"Most promising, however, was the actionof the New York Clearing House. Banksshall refuse to put the money of the corpo-ration out on call in amounts less than$100,000. Further, they shall increase theirservice charge on loans made for othersfrom 5% on the interest on the loan, to .5 of1% of the principal. Banks anticipated pro-tests, prepared to meet them by handing thecorporations a partial recompense. Interestrates on commercial accounts were raisedfrom 2% to 2.5% and on deposits for 30days or more from 2.5 to 3.5%.

"But a chasm still yawned between inter-est rates on deposits and on call money.Opinions were divided on the possibility ofcurbing speculation by refusing to lendmoney on behalf of corporations. The cor-porations, for example, might lend theirmoney directly, ignoring the banks. Or they

might start a bank of their own. Thereseemed, last week, a number of ways bywhich the money market might be taken outof the control of the Federal Reserve and ofits member banks."

Curiously enough, the dilemma of thetime was brewing. The Fed, in its efforts tohelp Europe, set off a cash drain from U.S.deposits. The Fed’s insistence to controlthe stock market and to stop the rise inequities caused its member banks to raisecall money rates to try to discourage bor-rowing. But the drastic imbalance betweenthe short-term and long-term became tooattractive. The higher the call money rateswent, the more money they attracted.

This is a very important lesson which weshould learn well. The stock market fromthis point would rise from the June low of202 to 386 by late 1929 at its peak. That risewas not squashed by the Fed despite risingrates. The higher the rates for brokers’loans the more money it attracted. There-fore, the age old scenario that the stock


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market falls with higher interest rates isclearly NOT TRUE!

It is clear that as long as dividends wererising and equaled or bettered the callmoney rate, the incentive to borrow wasNOT diminished but increased. If theshort-term exceeds the long-term rates anddividends are not hampered, overnightmarkets as well as brokers’ loans will attractmoney, not the opposite. Therefore, a risein the discount rate alone does not meanthat a bull market is over. The entire situ-ation depends greatly upon the earningsand dividends as well as the rate of growthin the total value of the stock market itself.In addition, overseas rates may have beenhigh but the safety of those loans was ques-tioned. Therefore, call money was far moreattractive and at least it was secured bystocks whereas foreign loans were alwayssubject to default.

Banking in the United States was seriouslythreatened by this double-edged sword oflosing time deposits and domestic deposits

to Europe. In August 1928, in a small townin Indiana, the Citizens National Bank &Trust Co. came up with a great idea to at-tract deposits. It opened the first drive-inwindow for banking. This advantage wouldeventually sweep the nation as a means ofattracting small time deposits.

August was filled with rumours of mergersin numerous industries. But the mostnoted, which came at the end of August justas the market rose to above 240, an all-timenew high, was the great Chicago bankmerger. During the last week of August,the stock of the largest Chicago bank, TheContinental National Bank & Trust Co.,rose from $545 to $676 a share in a singleweek. The stock of Chicago’s second big-gest bank, Illinois Merchants Trust Co.,jumped that fateful week from $875 to$1,282 a share! This merger meant that thenew Continental Illinois, the same bankwhich caused all the ruckus in the 1980s,would be the second largest bank in theUnited States. The price movements instock on mere rumour of mergers in those


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days was simply astounding. The pressmerely had this to say as August came to aclose: "Bulls rejoiced at the stock market’sunexpected spurt of strength."

As the month of September, 1928 arrivedon the heels of new highs in the industrials,the rails still failed to exceed the May highbut did manage to push above the Augusthigh. Bonds regained a little during Sep-tember but still traded within a half-pointrange. The industrials consolidated in oneof the most narrow monthly ranges in his-tory. Perhaps it was the calm before thestorm. The stock market exceeded the Au-gust high but closed lower on the month.Note the chart pattern very carefully. Thisis a definitive technical indication of a com-ing major move. For the market to haveheld at that level in a sideways pattern trad-ing within less than 5 points back and forthis not the sign of topping out but the clearwarning of a breakout.

September brought with it little newsother than rising call money rates. Perhapsthe quietness of Wall Street that month wasdue to a heat wave in Washington and NewYork. The local papers reported: "The heatand humidity rose to stultifying tempera-tures while people died." The heat wavewas so staggering that in Washington gov-ernment offices were closed and in NewYork the Grand Central Terminal closed.Nevertheless the New York Stock Ex-change was open and in New York it wasjoined by a completely new futures ex-change in September, 1928. It was the SilkExchange and the first trade was at $5.

In the midst of the heat wave, tradingreached a new record in the middle of Sep-tember, which passed the 4 million shareday mark. New highs were made on manyissues such as US Steel, Adams Express,Victor-Talking Machine and Montgomery

Ward. Although trading was at a recordlevel, the trading range on the industrials asa whole was the smallest in history with newprice highs and record highs in volume.Obviously, many people were shorting themarket and buyers were coming in simulta-neously. Despite the press and the publicstatements by the so-called "professionals,"the market failed to give ground. The bal-ance between the two forces at record vol-ume essentially cancelled each other out,creating an amazingly narrow tradingrange. This in technical terms is quite un-usual. Most narrow trading ranges are ac-companied by low volume as traders wait onthe sidelines patiently for the market toyield some sign of breaking through oneside or the other. So in many respects, Sep-tember 1928 was a month of many unusualrecords in the history of the stock market.This pattern is something we should neverforget for it preceded one of the strongestand most relentless rallies in history. Andas many always say, history has a uniquetendency to repeat.

September was also the month when thecocoa market in New York collapsed inpanic. Cocoa fell 115 points to $200 a ton.The excuse for the collapse was pinned onwomen. The press commented that moreand more women had taken up smokingand were eating less. Chocolate candy wasone item stricken from the list as womenstrived for a new, slim look. Smoking wascuriously enough being advertised in thepress as an aid toward dieting.

The banks in New York raised the rate on90-day loans to 7% and threatened to raisethem even higher if demand remainedstrong. The high on 90-day time moneyreached a previous high which had beenseen in only three out of the previous thirtyyears with the last high being hit in thedeflation days of 1920-1921. The rise in


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rates sparked much criticism. A well-knowncolumnist in those days was Arthur Bris-bane. He boldly commented on the occur-rence in his column: "Borrowers shouldsend three large gilt balls to be hung abovethe Federal Reserve Bank entrance, andsimilar ornaments to some of the big banks:This is what the law of New York State says,Section 370: ‘The legal rate of interest shallnot be more than $6 on $100 for one year.’Every bank charging more than 6% interestis violating the law and knows it. Whenmen extort eight percent for loans on abso-lutely good security, somebody ought to goto jail, beginning with the responsible re-spectability in the Federal Reserve."

The amazing thing is that the market heldthat September and surged even higher inthe following quarter. Commodities ingeneral were still in disarray. A crisis incondiments was the next commodity to de-part from the normal price affairs of theday.

Not all commodities were collapsing atthis point in time. The price of salt wascollapsing quite steadily. However, theprice of pepper was roaring. In those daysthere was even a spot and futures market onpepper. The price rose dramatically from12 cents a pound to 43 cents in the futureswhile the spot market was testing 40 cents.The crop from Lampong was cut in half dueto severe weather conditions during 1928.

Despite the doom and gloom and the ris-ing interest rates, neither the volume in thestock market nor the value of seats weredeterred. That September a seat reached anew record high as it went for $415,000.The number of seats remained constant at1,100 members.

There were some ominous signs from theindustrial sector which the market alsoshrugged off during September. Car load-ings (railroads) showed an increase duringthe week which ended September 1 of36,108 over and above the previous week.But the bears were pointing out that it was


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still 412 cars shy of the same correspondingweek in 1927.

The wheat crop was estimated to beslightly above that of the previous year. ButRussia had previously been a net exporterof wheat and it became increasingly clearthat Russia was losing its ability to producewheat and that it would have no excess forsale that year. Wheat prices began to firm.

One side benefit of the banks raising theirtime money rates from 7% to 8% was thedecisive shift in gold movement. DuringSeptember, Britain made its first gold ship-ment back to the U.S. Although the U.S.had lost $500 million in gold during the pastyear, thanks to the Fed, the first return ofgold was a small shipment of $2.5 million.It was viewed as a sign of possible easing ofthe cash flow problems which had beencreated by the Fed’s willingness to helpEurope at the expense of its own stability.

As October dawned upon Wall Street, callmoney rose to 9% but backed off to 8% andthen 7.5%. The export figures for the U.S.first half of 1928 were released. Theyshowed a $2.3 billion surplus which wasmore than any full year before the War, andit was $11 million above that of the samecorresponding period for 1927. Buyers be-gan to come in and the professional shorts,which had sold even more positions be-cause call money had reached 9%, a newhigh, began to panic. New record volumewas recorded again.

The New York Stock Exchange came outand made a statement that the month ofSeptember had broken all records for vol-ume trading, some 99,906,718 shares whichwas substantial compared to 67,703,538shares during August. The industrials ral-lied again, reaching a new record high andbreaking right through the September

highs that now had proven to be the calmbefore the storm. The rally took the DowJones industrial average from the Septem-ber high of 240 to 258. Dividend reportswere flooding the market and in the last fewdays of September, the quarterly dividendspaid out on stock were an estimated $125million. The interest paid on the corporatebond issues including governmental was anest imated $375 million. Call moneylurched ahead to 10% but still the stockmarket didn’t falter.

During October, the press was filled withreports of foreign governments seekingmore loans from the U.S. markets. Ger-many was reported to be looking for an-other $100 million, Greece $75 million andHungary $5 million. Time magazine re-ported that President Charles E. Mitchellof the National City Bank in New York toldthe German government that $150 millionin German bonds remained unsold on themarket already. Through hindsight, it be-came clear that outstanding foreign loans inthe U.S. had saturated the market. Thiscombined with the Fed’s policy of helpingEurope out by lowering the domestic U.S.interest rates artificially, only heightenedthe move from bonds to the stock market.Therefore, cash indeed became scarce be-cause of the drain on U.S. gold reserves andthe outstanding foreign bond issues, buteven a new high in call money up to 10%did not deter the market from moving sub-stantially higher.

The sentiment during that fall of 1928 wasstill very mixed. The bearish camp was stillwell entrenched with the so-called profes-sionals and was even enlarging. It was as ifmany a bitter bear was either broke or turn-ing into a bull. In the October 15, 1928edition of Time, an article appeared con-cerning the annual banking conference be-ing held in Philadelphia. The article began:


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"Bulls, of whom there are many, and bears,of whom there were few, looked last weektoward Philadelphia. Traders felt, and withreason, that the deliberations of 5,400 U.S.bankers gathered for the meeting of theAmerican Banker’s Association, held amore or less potent threat to the stock mar-ket. Many a banker, speaking for himself orhis bank, had warned against frenziedspeculation. The market had kept itsstrength; had soared through a recordmonth. But traders feared the effect of asolemn and public pronouncement fromthe Philadelphia convention. Resolutebulls faced the 5,400 bankers with hostility."

One of the more famous long-term bullsin the stock market had been John JacobRaskob who had recently become theChairman of the Democratic party. Hisstatement hit the market as a surprise, par-ticularly since he had been such a promi-nent bull.

"Since I have taken this position as Demo-cratic National Chairman, I have not pur-chased any stock whatever. It is my opinionthat security prices have so far outrun dem-onstrated values, earning power and divi-dend returns, that a material readjustmentis necessary before they will again be attrac-tive to the prudent investor. My name hasfrequently been mentioned as being promi-nently identified with Chrysler Corp, andRadio. As a matter of fact I have neverowned and do not own a single share ofChrysler Corporation stock. And the stockin Radio Corp. which I hold was purchasedoutright by me a long while ago and held asan investment. I am not interested directlyor indirectly in any pool or stock marketoperations."

Mr. Raskob’s statements were a shock atfirst but the market fell but a few points and

essentially held its ground during October1928.

Another well-known name came forwardwith statements on the market. He was Col.Leonard Porter Ayres of the famed Cleve-land Trust Co. His statement was as fol-lows:

"The transition to a new and sober era isnot going to be easy. The American peopleare in a mood of invincible optimism.Three years ago they were speculating inFlorida real estate and finally that bubbleburst. They then speculated in urban realestate and now they have turned to thestock market where prices of the stocks ofmail order houses, chain stores, motor com-panies and soft drink firms are selling on abasis to yield half as much as the obligationsof the U.S. government. All the experienceof the past points clearly to the conclusionthat prices are too high and must comedown. However, our concern is not aboutwhat may happen in the stock market. Wemay look forward to the future with confi-dence but the great rewards of business andbanking during the next decade will prob-ably go to the plodders rather than to theplotters, to the calculators rather than to thespeculators, to the thrifty and not to theshifty."

The Representative Louis T. McFadden,chairman of the House Committee onBanking and Currency also had a few com-ments about the situation that month. Inregard to the Federal Reserve policy oftight money, he warned that it would "pro-duce a business slump without intending todo so." However, he also warned that eas-ing the policy might send more cash into thespeculative sector. He therefore advocatedthat government should assume a moreauthoritative role and extend to the Federal


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Reserve "a commanding position...control-ling all the elements in the credit situation."

The Chairman of the Federal Reserve,Roy Young, also had a few remarks at the1928 banking conference. He stated:

"Responsibility of banks does not end withtheir depositors and stockholders. Banksalso have a responsibility to the communityin which they are located. It is my convic-tion that a healthy banking situation is thebest guaranty of a healthy economic devel-opment." In regard to credit he stated: "TheFederal Reserve cannot earmark its credit.But it can help steer the credit ship. Peoplemust not expect the impossible."

Despite all this bad news, the marketrallied. Perhaps one bit of news which wasto some degree a piece of relief but merelyadded some confusion was the death of theNew York Federal Reserve Governor Ben-jamin Strong. Many viewed it as hopefulthat the U.S. would no longer waste its re-sources in defense of Europe while othersinterpreted it as Europe losing its last hope.Either way it was bullish for stocks coupledwith the fact that Roy Young had little toreally state about the speculative money inthe stock market. The industrials that Oc-tober rallied by 10%, but the rails declinedfrom the September high, falling from justabove 144 to slightly under 139. The bondsrallied slightly but still remained within halfa point trading range.

November brought with it the elections.Wall Street remained firm and held itsground, never really giving into fears of aDemocratic victory. The market ralliedlike a charging bull paying no attention tobarriers or prominent "professional" bearswhich may have stood in its path. The DowJones Industrials gained nearly 20% in asingle month. The index rallied from 254 to

296, closing at the 293 level. The bearswere simply astonished and speechless.Again, despite the fact that the profession-als all felt that the market had topped theybecame even more confused. The publicclearly voted not merely for the Republicanticket but for the stock market as well. TheRepublican era of prosperity would con-tinue and Europe, begging on its knees formore borrowed money, was shunned at thedoor.

At last even the railroads charged ahead,rising from the depths of 142, reaching forthe stars and coming close to 153, a newrecord high. The bonds rallied prior to theelections, penetrating above 97 for the firsttime since the devastation of the past July.But then the bonds fell and closed belowthe October close. It was the final reactionrally in a collapse which would now unfoldinto a massive liquidation of bonds as capi-tal shifted into common stock.

Another bullish aspect came during thefirst week in November. President Alfred P.Sloan of General Motors announced thatthe third quarter earnings for 1928 were $79



PE

RC

EN

T

YEARLY: 1919-1929

1919 1926

6

5

4

3

2

1

0


190

million. That brought the first nine-monthperiod of 1928 earnings for G.M. up to $240million. This was reported by the press asbeing the largest corporate profit in peacetime history. What had become known asthe Raskob’s rule of 15X earnings meantthat G.M. should have been selling for $270a share which was $50 above the closingprice during the first week in November.U.S. Steel also announced earnings of $52million for the third quarter. That was $10million above 1927 and the largest in twoyears. U.S. Steel did rise to the 15X earn-ings rule and closed the first week of No-vember at $160 7/8.

Brokers’ loans were on the rise. For fiveweeks in succession they continued to makenew highs throughout October and intoearly November, reaching $4.9 billion com-pared to $3.3 billion in 1927.

There is no doubt that this was a seriousevent and that government was calling it aspeculative frenzy. But the shift in capitalfrom bonds to stocks was also significant.Given the total outstanding stock on theexchange, if all purchases were margined,brokers’ loans would have been $150 bil-lion. Obviously the margined position wasnot as far out of whack as the press andgovernment would have us believe. Theimportance of this perspective is quite sig-nificant. Although brokers’ loans were atrecord highs, in proportion to total out-standing equity holdings, it was quite small.This signified that outright cash positionsfar outnumbered margined positions.

The second important point of this per-spective is how corporations chose to raisemoney and how the public preferred to par-ticipate in that debt servicing. From Janu-ary 1, 1924 to November 1, 1928, total newissues of common stock placed on the mar-ket were $38 billion. The brokers’ loans

represented about 12.5% of those new is-sues. Prior to this period, it was common tofind corporations that needed to borrowdoing so through the bond markets. Therewas a decisive shift between the bonds andthe stocks as a means to borrow money.The bond market continued to decline fromthis point onward due to the large offeringsof foreign governments and the generallack of buying interest. Dividends in manycases offered comparable performanceduring this five year period. Where interestearned failed to meet a bond yield, themarket more than compensated for the dif-ference. The margin accounts did not careif call money rose to 10%, for the leveragedposition provided healthy dividends whichmore than covered interest costs on mar-gined accounts.

Therefore, from an analytical perspective,higher interest rates are obviously not adeterrent to the stock market. The condi-tions under which the market has fallenwith rising interest rates have been solelydue to the fact that rates rise faster or be-yond the yields on stocks. If the yields arehigher than the cost of money, rates will risebut they will not deter the market until thisimbalance is equalized. As we continue toexplore the market performance, we willalso begin to notice that interest rates arealso affected by international political con-ditions. Stocks have also risen ignoringearnings and in the face of rising interestrates when foreign political conditions havesparked a flight to the dollar based assets.

The buying continued throughout No-vember and it is best to let Time magazineadd the flavour of the moment. November19, 1928:

"FOOLISH? STUBBORN?"


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"Oils, coppers, utilities up 3 to 7 points asthe market opens Wednesday, then churnback and forth. Kennecott copper up 12,Curtiss Aero 12.25, Wright Aero 15.5. Turn-over 4,894,670 shares...More on Tuesday,5,037,330 shares, second ‘five million’ dayin history, only a handful less than on re-cord-breaking June 12. Montgomery Wardcloses at 366. Net gain; 17 points. Mount-ing, too, are Wright (6.5 points more, 22 intwo days), Coty, Inc. (10.5). Where is theticker? Over an hour behind (might as wellhave been a week) on Thursday, 47 minutesthe day before, 46 minutes on Friday. FridayMontgomery Ward adds another 18 points,closes at 384. It was 349 on Wednesdaymorning. What is happening to Radio?Climbing whole points at a time, Radiosoars from 234.5 to an incredible 270. Whois pushing it? No one knows?...Thus, theHoover market. Like its predecessor, themuch-loved, much-crit icized Coolidgemarket, it is the joy of bulls, despair ofbears. Will it last? Will it break? Foolishbulls or stubborn bears?"

Perhaps it was stubborn bears at this pointin the game desperately trying to pick thetop and send the market up even further.Oddly enough it was the very professionalsbeing pushed around by the little guy on thestreet. What a day! And December offeredonly a small short-lived glimmer of hope forthe bears. The market broke, tumblingback nearly 15% yet the industrials hadn’teven penetrated the November low. It wasan incredibly sharp drop. Largest in his-tory! But did it signal despair and the endof the bulls? Not even a 15% drop couldstop this bull from its divine destiny.

December rallied for year-end, and afterthe industrials fell to 258 and just when thepros thought they had the bull by the horns,or maybe it was the other end, it kicked upa storm and rallied straight up again, charg-

ing right through this November highreaching for that ultimate brass ring, whichby now was replaced by pure gold, andclosed a hair under 300. Indeed, who wasthe fool?

The railroads fell sharply that cold De-cember but rallied back quite impressivelyfor year end. Nonetheless, the rails failedto exceed the previous month’s high, clearlyyielding first place to the industrials. Thegreat era of the rails had come to an end andnow they were clearly reduced to a secondplace bet.

The bonds fell straight down from theopening bell that memorable December.They fell dropping below the previous four-month consolidation period and finisheddesperately clinging to 96, a level which itwould see only once during 1929 and thennever again for over a year.

In the final glimmer of analysis, 1928 wasa year of many lessons and stories. Its com-plete disregard for fundamentals, its disre-gard for the so-called well establishedrelationships, is a omen for the future. Thewords of two very famous men come tomind as we end one of the most impressiveyears in the history of the market. In 1901Charles H. Dow stated: "In most bull mar-kets there comes a time when the publiccontrols fluctuations and the efforts of thelargest operators are insufficient to checkthe rising tide." Those words were certainlytrue 27 years later as they are today. Thecontrast is perhaps Andrew Mellon whoonce said in 1926: "Gentlemen preferbonds."


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Chapter IX

1929

The mere mention of the year 1929 sendsshivers down the spine of perpetual bulls

who immediately pronounce that suchevents could never take place ever again.Others rub their hands in pleasant contem-plation of the events of 1929 and pronouncewarnings every October that this is the yearwhen 1929 will be relived. What is it thatdivides analysts and economists alike intotwo separate schools of thought that are asdifferent as night and day? Are there justi-fications for worrying that a panic such asthat of 1929 could possibly take placeagain? Or are such rumblings totally unjus-tified and merely a ploy to sell newsletters?

We have reached that infamous year afterscrolling through the annals of time on amonth-by-month basis. We have looked at

and read first hand the accounts of the freepress. We have seen for ourselves that theearly stages were not the wild speculativemadness which most would have us believe.We have also seen the fears and the dreams,the concerns and delights, along with theharsh, cold facts from the past that some-how ring a familiar bell. We have scruti-nized this analysis and torn apart manysupposedly infallible relationships. Wehave come to a better understanding ofwhat really happened on a month-by-month basis, an analysis which has simplynever been brought to light before.

We have come to realize that the picturespainted by most writers of this period havegrossly misrepresented the era. They haveunfairly focused upon the final year inwhich speculation did run far ahead of rea-


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son. Yet one would also be left with a dis-torted idea of using the last few months ofthe gold and silver bubble in 1980 to de-scribe the entire period of that bull market,which ran between 1970 and 1980. In thisrespect, those who have focused only uponthe last few months of this bull market andthe following crash have done a grave injus-tice. If we do not understand how this mar-ket arrived in 1929, then we would neverknow if a crash of this magnitude would bepossible again or not.

What is the value of all these words, allthese thoughts, all these interpretations?The value is immeasurable. History has anuncanny quirk about it. It loves reruns. Per-haps it is merely man’s way of refusing tolisten to the wisdom of his parents, muchlike a teenager who suddenly believes heknows all. As a result, perhaps each genera-tion must struggle through the corridors ofthe same school of life where its fathersonce walked. The echoes of the past can beheard if you listen clearly. The question is,can we learn from past mistakes? Werethere warning signs that were definitive and

clearly defined? Was it all a mere night-mare or could it honestly happen all overagain?

As the year 1929 dawned upon the narrowalleyways surrounding Wall Street and itsvarious exchanges, the Dow Jones Industri-als continued to rally even further. Afterreaching the 300 level at the end of 1928,the industrials surged even higher, closingJanuary on a new record high at the 318level. The market had climbed a long wayfrom the August 1921 low where it had onceupon a time planted itself at the 64 level.The relentless upward drive was still there,gaining, but at slightly more than 10% overthe December 1928 high.

The railroads continued to climb and ex-ceeded the 1928 high at last, but merelyreached 158, barely a 4% gain. The bonds,which had closed 1928 miserably trying tohold the 96.00 level, improved at first inearly January. They managed to rally backto 96.14, and then fell toward the end of themonth, closing below 96.00 and still cling-ing to the edge by their fingertips.


1921 1923 1925 1927 1929 1931 1933

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300

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The institutional game had been growingthroughout the 1928 period. Today in the1980s we call them "institutions" or perhaps"mutual funds." In the 1920s the name com-monly used was "investment trusts." By thedawn of 1929, there were 200 listed invest-ment trusts. There were few rules or disclo-sures in those days. Many famous nameswere associated with the investment trusts,such as Walter Chrysler, Arthur Cutten,William Straus and Fred Fisher. In 1929,Time magazine defined the investmenttrust so succinctly that we simply couldn’tdo a better job. Here is Time’s description:

"Perhaps the best analogy to an Invest-ment Trust would be a hypothetical bankthat had no restrictions on what it could dowith the depositors’ money."

According to reports, there were only 29investment trusts in 1925. This obviouslyillustrates the huge growth rate in this in-vestment sector. The trusts were not re-quired to disclose who owned what stock

and, in many cases, the collective moneywas used to spur onward personal wishes inthe market. The investment trust wouldeventually prove to be one of the greatestdisasters for the small, unaware investorand a primary reason for many of the SECrules that exist today.

After the January rally, the month of Feb-ruary brought a continued decline for thebonds as they fell to about 95.10. This steepdecline had come after a long, hard battlefor the bond market since 1915. The bondsreached their highs of 96.25 during January1917 and fell straight down into the fall of1918, reaching 81.94. After a brief three-month rally into year end in 1918, the bondsmanaged to test 88.58. After that, it wasvirtually a free fall into 1920 where theyreached a major low of 71.96.

From that moment on, the bonds made along hard rally as we have seen in the pre-vious chapters. 1922 brought an initial highon the corporate bonds of 92.12. After asharp but quick correction into early 1923

Long BondMONTHLY: 1921 - 1933

1921 1923 1925 1927 1929 1931 1933

100

95

90

85

80

75

70

65


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where bonds tested 85.77, the bonds begana slow but firm rally into January 1928 andreached 99.78. Therefore, the decline thattook place in February 1929 was significanttechnically. Had the bonds been a soundinvestment within a long-term bull market,then they should have declined and hold thehigh of the previous cycle, which was estab-lished in 1917 at 96.25. After the latter partof 1928 desperately tried to hold that tech-nical long-term support, it gave way.

The industrials dropped below the Janu-ary low by 2 points and then rallied onceagain and exceeded the January high, clos-ing a fraction higher. Finally, the industri-als did manage to punch through the 320level. The rails held the January low andsucceeded in penetrating the January highbut closed a bit lower.

With the entry of Herbert Hoover into thePresidency, the death of Benjamin Strongof the New York Fed and the resignation ofDaniel Crissinger as Governor of the Fed-eral Reserve Board, Coolidge’s appointeeto the post, Roy Young, adopted a different

approach. Hoover stated that Young wasan "able, courageous, and cooperativeman." Hoover later stated in his memoirs:"Prior to my inauguration as President Iconferred several times with him and foundhim fully alive to the situation. He agreedto use the full powers of the Board to stran-gle the speculative movement."

It was in on February 7 that the FederalReserve began to make outright threats toWall Street. Brokers’ loans reached a newhigh of $5.6 billion and the Fed basically feltthat enough was enough. Brokers’ loanshad stood at $3.5 billion in June 1927. TheFed came out and stated that a memberReserve Bank is "not within its reasonableclaims for rediscount facilities" when Fedmoney is borrowed and used in "making ormaintaining speculative loans." The Boardalso threatened to "restrain the use of Fed-eral Reserve credit facilities in aid of thegrowth of speculative credit."

Simultaneously with the Fed’s an-nouncement, the Bank of England raised itsdiscount rate from 4.5% to 5.5%. This was


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a move to decrease the flow of gold fromEngland to the U.S. which had resumedwhile the New York discount rate stood at5%. This statement in early February, com-bined with England’s hike in the discountrate, was the cause of the early Februarydecline. But the move did not succeed inbreaking the market. In later years, someclaimed that the Fed’s statements wereminimized by President Coolidge, who afew days before he left office, made an an-nouncement to the press in which he as-sured the people that prosperity was"absolutely sound" and that stocks were"cheap at current prices."

Debate was brisk over what rights the Fedhad to single out the stock market. Manyfelt that the entire situation had beencaused by the Fed’s artificial lowering of therates to bail out a crisis in credit throughoutEurope. Time magazine accurately madean observation about why the marketshrugged off the finger-pointing or perhapswe should say neck squeezing:

"Speculators have long since realized thatFederal Reserve authorities disapprove oftheir activities. The important question liesin what steps the Federal Reserve can taketo translate disapproval into actual cuttingoff of credit. Discussions of the power ofthe Federal Reserve Board (as distinct fromits opinions) is obscured by the popularconception of an all-powerful group of gov-ernment appointees sitting in Washingtonand turning credit on and off like firemenplaying a hose. The essential theory of theFederal Reserve System is that the memberbanks in each district get together, pooltheir resources and form a virtually inex-haustible reserve fund upon which all mayfreely draw. Therefore, although the Fed-eral Reserve Board may frown upon the useof this reserve for speculative purposes, itcannot lose sight of the fact that the FederalReserve banks are privately owned, are op-erating largely with private funds, and fun-damentally exist for the sake of supplyingmoney rather than withdrawing it.

"As for the discount rates, here again it isthe province of the twelve Reserve banks


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(not of the board) to initiate rate changes.Here the Reserve banks have a specific andunquestioned method of making it expen-sive to borrow money. But this methodcannot be indiscriminately applied. In thefirst place, high discount rates will attractmoney from foreign countries (deemed tobe inflationary in those days). More impor-tant, however, is the fact that the Reservebank cannot make it harder for the specu-lator to borrow money without making itcorrespondingly harder for the business-man or the farmer to borrow money. A risefor one is a rise for all. If Wall Street paysdearly for money, so will Main Street."

This commentary sums up the attitudeand the debate between the Fed and WallStreet. Was the Fed trying to blame WallStreet for its own mismanagement?

There can be no doubt that a change inFed policy took place in February 1929 justone month prior to Hoover’s inauguration.One member of the Federal ReserveBoard, Adolph Miller, stated years later ina July 1935 magazine article that "after wait-

ing for the individual reserve banks to initi-ate a policy of safety, the Board in February,1929 took matters into its own hands,adopted a policy of ‘direct pressure’ andissued a warning to the public." It did so,said Mr. Miller, "because its anxiety overthe situation had become very great." Her-bert Hoover stated that the credit policy of1927 was enacted "In hope of preventingEuropean difficulties. But certainly, thehuge budget deficits, currency inflation,vast increase in armaments, and growingmilitary alliances (In Europe) which wereat the root of the trouble were not to becured by a poultice of inflated credit fromthe United States. I do not attribute thewhole of the stock boom to mismanage-ment of the Federal Reserve System. Butthe policies adopted by that system mustassume the greater responsibility." (HisMemoirs 1952.)

There had been many bubbles burst invarious commodities and the huge Floridareal estate boom. No one bothered to sin-gle those markets out. The Fed had madea grave error in trying to bail out Europe. It



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set off a huge series of offerings of foreigngovernment bonds which were just lyingabout unsold. The people were just fed upwith the foreign borrowing and decided tomove cash into U.S. assets and take controlin their own hands. The mere facts that theEuropean markets peaked shortly after thetime of the central bank intervention of1927 and that the dollar itself had bottomedduring March 1928, are strong evidencethat foreign interests began to sense troublein Europe and assets flowed into the U.S.stock market.

We have already discussed how much newcorporate financing was taking the avenueof common share offerings. Had those of-ferings been in bonds, the Fed would nothave had a sacrificial lamb. But as eventswould have it, the stock market was theFed’s whipping boy for its own mismanage-ment.

Also, corresponding with the hike in theEnglish discount rate, a sizable jump of fullpoint, news came out that Mr. MontaguCollet Norman, Governor of the Bank of

England, was on his way to the States ac-companying a $7.5 million gold shipment.Again, he was on his way to discuss therecent turn in cash flow and to seek a wayto quickly end the flow of gold from Britainto the States. The pound had fallen sharplyduring his term and with the aid of the Fed’shelping hand through artificial maneuversto lower the dollar and boost the Europeancurrencies, the pound had rallied back to$4.85. But the U.S. cash shortage set off bythat maneuver had cost the U.S. over $500million in gold reserves, which had servedas a base for nearly $7.5 billion in credit.Therefore, the brokers’ loans singled out bythe Fed were less than the credit lost by theFed’s measures to lower the dollar on ex-change markets.

This is a lesson that 1929 has offered forour serious consideration today. The G-5meetings of 1985 tampered with the freemarket forces to correct the effects of gov-ernment’s own mismanagement and to pre-vent a debt crisis in Europe sparked byinflated currencies and deficit spending.This may very well set off another round of


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higher interest rates moving into 1989 oncethe intervention and manipulations of 1985break down in 1986-87. If history repeatsonce again, the G-5 boys of 1985 have triednothing new. The G-4 boys of 1927 triedthat same path and took a seriously wrongturn.

The Fed was not about to give up easily.The Fed, under a change of managementand a new President, became preoccupiedwith bringing an end to speculation. Timemagazine reported on February 25 how theFed went crying to Congress:

"Into Congress last week overflowed thefinancial argument between Federal Re-serve Board and Wall Street. A mingledoutburst of oratory, ethics, provincialismand little economics was the result. Theprevailing sentiment was strongly againstthe speculator. Since, however, the verySenators and Representatives who weremost inclined to view Wall Street as theheart of the money octopus also regardedthe Federal Reserve System as at least atentacle of the same monster, the bankerwas scolded while the broker was flayed.

"The Senate passed a resolution askingthe Federal Reserve Board to lay before it,such information as might be ‘helpful’ insecuring anti-speculative legislation. It wasa mildly-worded resolution, perhaps be-cause it was edited by Senator Carter Glassof Virginia, one of the authors of the Fed-eral Reserve Act (1913)."

The Fed, after crying on the shoulders ofthe Senate, perhaps realized that if it criedtoo much, Congress might step in and dis-rupt its precious authority. So the Fed usedanother method at its disposal. The Fed-eral Reserve Board each week made a bigdeal over meetings where it purposely triedto imply that a decision would be taken to

raise the discount rate. Each Thursday af-ternoon the market churned back and forthcreating a violent and choppy trading range.But following each meeting, their commentwas merely "no announcement." Week af-ter week, the Fed employed those scaretactics trying desperately to influence themarket and cause a major panic sell off. Butthe stock market held its ground. This wasperhaps the first time in history that the Fedopenly resorted to an official policy of scaretactics. This established the precedent andto this day whenever the Fed comes out andannounces what it will do, 99.9% of the timeit takes no such action. The Fed always actswithout warning whenever it raises or low-ers the rates, trying its best to make surethat no one will profit from the move. Sowhenever it openly proclaims what it isthinking of doing, it is unquestionably try-ing to manipulate the market, which is go-ing against what its policies would like tosee and what its management is incapableof accomplishing.

The Fed was not satisfied with this newtool of open verbal warfare. The Fed alsobegan to sell government securities andbankers’ acceptances, further depressingthe bond market. Then member bankscalled in $60 million from the call moneymarkets. Call money, which had settledback to 6.5% even with record highs inbrokers’ loans, jumped to 10%, a previousrecord high. When the dust settled, the fig-ures came out showing why the Fed hadissued its warning. The outstanding credithad increased by $250 million. But was thatall due to the stock market? Could thedecline in the dollar have the slightest influ-ence? The Fed chose to blame Wall Streetrather than a policy it had inflicted all byitself. Did the fact that time deposits werepaying only 2% have any bearing upon therise in call money deposits? Before the yearwas over, the Fed decreased its holdings of


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government securities by nearly 60% in itsbattle against the stock market.

As March came on the scene, the DowIndustrials traded sideways and remaineddirectly within the confines of the tradingrange established during the previousmonth.

Andrew Mellon, famous for his sayingthat gentlemen prefer bonds, came outpublicly that March with a prognostication.He basically stated that bonds, in his opin-ion, were very much depressed and offeredan excellent buying opportunity.

Andrew Mellon was a man of honour anddistinguished character and in many wayshe was an outcast among the mere aggres-sive New York bankers. When his grandfa-ther arrived from Northern Ireland, he hadbrought a small fortune which he dividedinto three parts. With the first part heopened a bank in Pittsburgh, Pennsylvania;with the second he bought stock in Pennsyl-vania Railroad; with the third he investedin real estate in St. Louis. This brought the

family millions of dollars which were usedfor charity.

Andrew Mellon was undoubtedly a manof compassion and understanding while allthe time he remained a country banker atheart. One day, an inventor came to Mr.Mellon hoping that his bank would lendhim money to continue his research. Theman talked at length and it was obvious thathe had spent his last dime. The process hewas working on would create a new indus-trial metal. Andrew Mellon, as the banker,told the man that his bank could only lendupon security. But Mr. Mellon then addedthat he personally would lend the man$10,000 on his character. The funds wereexpended and more was needed, whichMellon provided. When the process wasperfected and a production plant was nec-essary, Mr. Mellon called the inventor inand told him that he would put up the sev-eral hundred thousand dollars that wereneeded and it was up to the inventor to saywhat his capital was worth. The inventorasked Mellon why he did not forecloseupon him for he had no way to repay his


202

outstanding debt. Mr. Mellon simply re-plied, "The Mellons never did business thatway." The inventor offered a 50-50 split andAndrew Mellon agreed. The Americanaluminum industry was born that day.

Andrew Mellon had a reputation as aconservative, and his philosophy was alwaysto treat his fellow man with dignity andrespect. This reputation did not serve wellfor a prophet of the bull market.

Mellon, long a bond advocate rather thana speculator, actually helped the stock mar-ket and hindered the bonds. Wall Streethad never viewed his opinion to be of par-ticular interest. However, in this case, theyfelt that if he was advocating buying bonds,that meant he must have thought that theFed wasn’t going to raise the discount rate.Many stocks jumped 25% as the bonds soldoff.

During the last hours of March, the callmoney rate jumped to a new record high of14% for the last nine-year period. The

banks had withdrawn another $25 millionfrom the call money market. The next day(March 26), call money opened back downat 12%. It rose again, establishing a newhigh of 15%. Some of the favorite specula-tive stocks were hit hard, many showingdeclines of 10 points or more. Call moneycontinued to climb, reaching 20% as thecasualties mounted that day and some in-vestors were forced into liquidation whichhad grabbed the bull by the horns. But bythe end of that eventful day, many stocksrallied sharply even with call money at 20%as shorts bailed out. Confusion among thefundamentalists continued to mount.

The shorts, made up of the "professional"traders, had been convinced that they hadpicked the top and the ranting of the Fedwould break the market sooner or later. Butas the trading approached the final hour,the stock market, as if guided by some in-visible hand, rallied once again with avengeance. Order takers were dashingaround; the ticker fell far behind. Onlythose on the floor knew what was happen-


203

ing. Pure panic showed in the pale whitefaces of the professionals as they ran forcover. In the end, many stocks closed abovewhere they had opened. The swings wereviolent. Some stocks had dropped 15 to 20points from the open and closed up 6 pointson the day. But many others remainedfairly well depressed. Allied Chemicaldropped from its 1929 high of $305.25, clos-

ing on March 26 at $260.25. Chrysler Corp.fell to $89.75 after reaching a 1929 high of$135. General Electric fell from its 1929high of $262 3/8 to $219. MontgomeryWard fell from $156 7/8, closing at $114 5/8.

Granted, throughout the bull marketmany strange and new issues had come onthe market. Anyone who has dr iventhrough Staten Island or along the BeltParkway en route to John F. Kennedy air-port in New York will recall the sight ofthousands of mausoleums which line thehighways. A new issue hit the market atabout this time with units being offered at$106. It was Mausoleum Corp. of America.Even the graveyard business had taken thepublic route.

March was torn from the calendar pagesof 1929, and April suddenly appeared onthe scene. What would it reveal? Devasta-tion or another untold rally? As call moneyremained high, so did the stock market.The Dow Industrials still traded sideways,consolidating in the midst of confusionwhile engaged in a battle to the death withthe Fed. March had closed back under 310,while many speculative stocks dropped15% or more. The market churned backand forth with debates still emotionallyheated on both sides. But the Dow Indus-trials rallied again and reached the highestmonthly closing in history, just a fractionbelow the 320 level. But despite the highestmonthly closing, the February intra-dayhigh had remained untouched.

March had brought a higher degree ofpanic to the transportations, which at thattime had been called the rails. April con-tinued to rain on their parade, keeping therails quite depressed. Many speculatorshad been playing the railroads because theyhad always been the leading segment of thestock market. The huge bull markets of the


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early 1900s were built upon the back of thesteel rails that at last connected the UnitedStates from one coast to the other. But thisbull market was different. Those who hadthought that there would eventually be thatmoment in history when the rails wouldrally and snatch the load from the youngupstarts that made up the industrial groupwere being slaughtered. New highs in theindustrials did not mean new highs for therails. This factor eventually vindicatedSchumpeter’s theory of innovation. Theprevious bull markets were built upon therailroad innovation. But the bull market ofthe 1921 to 1929 era was built upon theinnovation of the automobile industry.

March had brought sheer devastation tothe bond market as it collapsed from above95 to test almost 94. As call money wenthigher, the bonds simply buckled. Many atrader had shorted the bonds and boughtthe stocks purely on his conviction that theFed had blown the economy through itshelping hand, which this time they felt hadstretched out much too far. But as callmoney eased to some extent and stocks

steadied, many were forced out of thespread and the bonds rallied in April. Forone brief and shining moment, the bondsexceeded the 95 level for the last time in1929, but closed the month of April belowthat magic psychological barrier.

As May appeared, the bonds collapsedviolently. Bond traders literally ran forcover. It was a collapse far worse than everbefore, which reminded one of the panic inthe bond market back in 1917. The bondsfell from nearly 95 to 93 in a single, straightdownward thrust. If there was ever a timethat would have brought a tear to the eye ofeven the most reputed bond bull, such asAndrew Mellon, it was May of 1929.

Time magazine reported the early stagesfor the first week of May as follows:

"AGAIN, ZOOM"

"Possibly unchastened, but certainly cau-tious, the Stock Market last week edged itsway back across the four million shares aday mark, succeeded in maintaining a bull-


205

ish though still rather bilious, complexion.Yet only the memory of its recent crisis, plusthe still large, though lately deflated loansto brokers, could have kept the Marketfrom lowering its horns in another bullstampede. For of bullish portends therewas no end."

May brought with it a procession of biggerand more lavish corporate earnings. Gen-eral E lectr ic posted a "net" profit of$13,862,298 for the first quarter of 1929. Itwas an all-time new record. U.S. Steel pro-duction exploded from its 1928 year-endperformance of 96% capacity to the fullnine yards, 100%! Even the less dominantsteel producers were running at 98% capac-ity. News also broke that AT&T had be-come a $3 billion entity. Where would it allend? Were the warnings and ranting of the

Federal Reserve justified? Were brokers’loans sucking up too much capital, divertingit from industry and threatening the entirestability of prosperity? Well, you couldn’tsupport that argument looking at the earn-ings and production figures that were com-ing out. Industry was forging ahead at fullsteam! How could the Fed justify pointingthe finger at the stock market as the root ofthe cash bullion withdrawals and tightmoney? If a true age of prosperity everexisted, was it not 1929 with U.S. Steel at100% capacity? Let’s face the facts. Funda-mentally, industry was at an historic, profit-able production level. If stocks shouldrally, it would be logical to find such a rallywhen industry is at its prime rather than onthe last stop of depravation.

May continued with many news topics thathighlighted government’s participation inthe entire event. In New York, a hefty gaso-line tax was being imposed. The taxi driversscreamed and warned that the excessiverates would force them out of business.Fares had to be raised nearly 20% in a singlemove due to increased taxation. The bat-tlefront between government and the pri-vate sector expanded to many areas, notmerely the stock market. The depressionwould be caused in part by the excessiveincreases in taxation and the tight moneywhich had flowed to Europe due to theFed’s intervention.

The Presidential committee on unem-ployment, which began in 1921, finally re-leased their prognostication in May 1929."All Is Well," they proclaimed. "No seriouscyclical fluctuations have characterized theperiod under review." This was very welloutdated and of no essential significance,although this report was welcome news forthe bulls.


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In June, the rails rallied and exceeded theFebruary 1929 highs, and they managed tosustain it, closing on the highs at the end ofthis month. The bonds consolidated withina half a point range but remained huggingjust above the devastation which createdthe low of May. The industrials rallied thatmonth, taking off from just a fraction below300 to nearly 335, which was a new recordhigh. They managed to close June on thehigh tick, clearly above the previous fivemonths of choppy sideways agony.

During early June, the bears spread ru-mors that the famed bull, William Durant,had been pressed for margin during Mayand that he was on the verge of bankruptcy.But bullish reports that U.S. exports ofautomobiles had reached a record for 1928with some 515,000 cars landing at foreignports was welcome news. The great bullmarket, which had been built upon the backof the auto industry, was clearly still thegleam of the bull’s eye. The numbers ofcars registered around the world in 1928were as follows:

United States....... 24,493,124Great Britain..........1,128,200France.....................1,098,000Canada...................1,061,830Germany................531,000Australia...............516,695Argentina..............310,895Italy........................177,330Brazil.....................165,200New Zealand.........151,454

The above list is reflective of world eco-nomic strength in itself. This clearly illus-trates that the United States was indeed theland of opportunity and the wealthiest na-tion on the face of the earth.

The market continued to rally into July asnews of record car loadings hit the press. Inthose days, car loadings at the railroad wereviewed as a good indication that the econ-

omy was moving. This interpretation wasbased upon the fact that it was the railroadsthat delivered cars, wheat, corn and numer-ous industrial products from manufacturerto retailer.

Time magazine reported the comments ofArthur Cutten, famed bull market player,on July 22. When asked about the market,his comment was: "The two things a manneeds most to play on the market are nerveand vision. People say that the bull marketof the last four years has caused an over-valuation of all stocks. I don’t think this istrue. It was true in 1922 when industry wasoverinventoried. But in the closely knit or-ganization of business today, stock pricescan’t far overrun their real demonstrablevalue." The fact that stocks would eventu-ally fall to 10 cents on the dollar by 1932proves that Mr. Cutton’s beliefs were false.When it comes to market movement, logichas never stood as an important factor inthe final hour.

The market began to run up to new highs,once again for another reason. Banking!The foreign loans naturally caused someconcern for the stability of the banks. Thisis perhaps understated for the time. Butwhen the "Clarke Crash" took place in mid-1929, people began to think twice aboutleaving money in a bank altogether.

Time magazine appropriately wrote ofthis incident and how it affected the senti-ment of the population at that point in time:

"CLARKE CRASH"

"Many a Manhattanite last week began tothink that putting savings in a sock was per-haps not such a foolish idea. Just as Stateofficials were making a final report on lastFebruary’s City Trust Co.’s failure, theirstatements shared headlines with first in-


207

vestigation of Clarke Brothers, anotherManhattan banking firm, which last fort-night closed its doors. First reports put theClarke failure at $4 million and gave de-positors hope of getting 25 cents on thedollar. Later it seemed likely that the fail-ure was for $5 million, that 5 cents on thedollar was the probable figure.

"Clarke brothers (James, Philip, Hudson,Clarke and John F. Bouker) announced thatthey would do everything they could, at thesame time refusing to answer many an in-vestigating question and showing few symp-toms of real cooperation. Investigators forIrving Trust Co., receivers, quickly discov-ered that the listed assets of the bank hadlittle meaning. Their bad bonds, bad oilstocks, bad loans. There was a credit of$840,000 against the Now York Port Termi-nal Co., a company which was said not to beoperating if it had ever been formed. Alsothe brothers had apparently borrowed$404,995 from their own bank. Thus whileClarke brothers claimed assets of $5 millionthe actual value of these assets was figuredat a minimum of $640,000 and a maximum

of $1,830,000. There are some 3,000 de-positors, none of whom will receive any-thing for at least three months. Sixdepositors said their deposits had been ac-cepted the day before the bank closed.

"Layman who think that banks are allalike, wonder how the State Banking de-partment had permitted Clarke Brothers toget into such a dreadful condition. Explana-tion lay in the fact that Clarke Brothersunsupervised, belong to the class of bankinginstitutions known as ‘private bankers’which do not have to be supervised as longas they do not describe themselves as‘banks,’ do not accept deposits that at any-time run under $500, do not transmit moneyor negotiate notes. The $500 minimum de-posit regulation passed in 1914 is supposedto keep widows, orphans, and other ‘small’depositors out of such banking houses. Pre-sent day prosperity permits many to save$500 without having good banking judge-ment.

"Because Clarke Brothers conducted aprivate banking business they have been


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erroneously described as a ‘private bank.’A private bank is really an entirely differentkind of institution. It is fully supervised. Itcarries on a restricted specialized business.Example: R.H. Macy’s Manhattan depart-ment store is a private bank because it ac-cepts deposits, pays interest, is in thebanking business, but it is primarily a de-partment store and its depositors are itscustomers.

In all sectors of banking. Some began toattribute the rise in interest rates to the cashshortage originally sparked by the Fed.Others began to become concerned thatmay be a time bomb was ticking away. Thestock market began to look even better.They knew, for example, who was makingmoney and who was not.

In July, U.S. Steel announced that itsearnings for the first half of 1929 were $94million compared to $87 million for 1928.Still the upward trend in corporate earningswas clearly intact.

The new issues were still pouring out. InJuly 1929, the famed department store ofBonwit Teller & Co. went public, offering60,000 shares of preferred at $52. Whilenew bond issues floated around begging fortakers, stock issues were sold on the mereopening of the book.

The activity in the stock market was stillbrisk despite the groans that could be heardfrom the Fed on each and every new hightick. Nonetheless, the exchange approvedwhat was then termed "floating brokers."This new term applied not to some va-grants, but to the opening of branch officeson board the oceanliners. The stock bro-kerage firm of De Saint Phalle & Co. wasapproved to open offices on the FrenchLine ships. Now you could trade stock onyour way to Europe and back.

The real estate market was a poor invest-ment. Those who had real estate which wasdeemed to be worth $50,000 were forced totake $25,000 or even $20,000 if they neededimmediate cash. The easy liquidity ofstocks had depressed the real estate market


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as an investment, as had the high interestrates. In New York, a group of prominentManhattan real estate brokers announcedthe formation of the New York Real EstateSecurities Exchange. The exchange was setup to operate in an unusual manner. TheRealtors would issue stocks and bonds withreal estate as security. Therefore, the publiccould trade in the securities which repre-sented real estate holdings.

"Neither private banks nor private bank-ers affect the stability of the standard nor-mal, supervised, incorporated savingsbanks and trust companies which constitutethe type of bank which the public recog-nizes as such and in which the public hasmany a safeguard for its money."

There were numerous banking operationsin those days and the Clarke failure is per-haps an example of the instability whichexisted within the financial community.Banking failures were now on the rise andin Florida 25 banks failed in a single, swiftblow. The Florida incident was being ex-cused as an isolated affair. The banks re-

portedly failed because they were filledwith uncollectable land-boom notes. Thelast deposits amounted to $34 million. Butan additional cause of the failure was a fruitfly which destroyed the Florida crops. Thedevastation was terrible and the banks, al-ready struggling with bad notes from theland-boom era, now faced failures on thepart of producers.

The banking failure stories were gainingwide publicity. Many people began to beconcerned that there was a potential prob-lem.

The war between the Federal Reserve andWall Street had persisted since February.The Fed, perhaps lacking the authority toreally take any measures, continued to har-ass the stock market with its verbal assaults.

We must commend Time magazine forfinally taking a stand and reporting the situ-ation as it really was in the August issue.

"FEDERAL RESERVE"


Rat

e of

Inte

rest

in %

1927 - 1932

1927 1928 1929 1930 1931 1932

6

5

4

3

2

1

0


210

"Last February the Federal ReserveBoard harassed the market by conveningevery Thursday to discuss a raise in therediscount rate, then reporting ‘no an-nouncement.’ It formally announced that‘when it (the board) finds conditions... thatobstruct Federal Reserve Banks in...somanaging credit facilities as to accommo-date commerce and business, it is itsduty...to take measures to correct them;which in the immediate situation means torestrain the use of the growth of speculativecredit.’ For months no more was heard.Brokers and speculators forgot. Last weekwhen the Federal Reserve Board went intoa conference, expected to last three or fourdays, few noticed it and fewer guessed thepurpose."

The Governor, Roy A. Young, emergedthis time with an announcement: "We haveconsidered how the resources of the Fed-eral Reserve System might best be con-served and made available to meet autumnrequirements. The problem has presenteddifficulties because of certain peculiar con-ditions." The Fed raised the discount ratefrom 5% to 6% in one move. Only Chicagoand Philadelphia refused to raise theirrates.

Time magazine reported on August 19thas follows:

"THE MARKET"

"Commuters on their trains last Fridaymorning discussed and laid grim bets onhow far the Market would fall. The LosAngeles and San Francisco markets, stillopen on the previous afternoon when theBoard’s announcement was made hadcrashed badly. Six hours ahead of NewYork, Friday’s market in Amsterdam hadopened with U.S. Steel plunging downward.To add to the threat of another Black Friday

(Sept 24, 1860 ) was the fact that brokers’loans reached a new all time high over $6billion. At the New York Stock Exchange,the gallery was packed with spectators by 9:30 am. Five minutes before the opening theticker flashed. ‘The floor is filled with sell-ers.’

"when the gong sounded, trading beganwith clamorous confusion. Ten thousandshares of AT&T were sold at $266, 15 pointsoff; 1,000 of General Electric, 14 off; 11,000American & Foreign Power, 12.25 off;20,000 of General Motors, 3 5/8 off; 15,000of I.T.& T., 5 5/8 off; 7,000 of Packard, 9 1/8off.

"The New York Times averages showed adecline of $9.66 compared to the recordMay 22 decline of $8.12 and the December8, 1928 break of $5.47. Through all the fury,call money ruled at a modest 8% and duringthe day there was a brief rally as bargain-hunters bought, shorts covered with largeprofits. But then the rise stopped as if someheavy hand lay upon the market, graduallydriving prices back into low ground. Heavyas the hand might have been on Friday, itsoon lost its strength. Saturday saw gains in


211

the general list. By Monday the rise, al-though not universal, bore up many stocksand U.S. Steel, the market leader, reacheda new all-time high, $229 5/8."

The interpretation of the discount ratehike was beginning to vary. Some arguedthat the rise was merely an adjustment tothe higher sustained levels of call moneyitself and that the hike was not necessarilyan indication of higher future rates. Col.Leonard P. Ayres of the Cleveland TrustCo., suggested that the result might be afurther expansion in credit. He pointed outthat while the Fed raised the discount rateto 6%, the Reserve Banks themselves low-ered the buying rate on acceptances from5.25% to 5,125%. This actually meant thatbanks could profitably sell their accep-tances which were normally used to financeexports and imports as well as commoditycrops. This in turn would free up a lot ofcash and make it available for further cropfinancing as well as speculation. Col. Ayres’interesting suggestion, in fact, pointed tothe Fed’s attempt to crack the market with-out actually tightening cash. Was it in fact

an outright ploy for the publicity itself? Onthe surface that rate hike certainly appearsto be precisely that, a ploy.

The month of August was actually thehighest monthly closing in the eight-yearbull market. Just one week from the top,we looked at the auto stocks which had ledthis rally from the depths of depression in1921. The list that follows illustrates theclosing prices of August 23 and the pricesfor which they would be selling on a 15xearnings ratio which was known as theRaskob rule:

From the high of 380.18 reached on March26 on the Dow Jones Industrials, the markethad fallen back to an intra-day low onMarch 28 at 370.34. But during August,going into Labor day, the industrials ralliedwith a vengeance once again. The industri-als reached an intra-day high of 383.96 andclosed the month of August at 380.33, thehighest monthly closing in history. As thelong weekend gave time to ponder all thescenarios of whether the Fed was tighteningor not, the traders became anxious to re-


212

open on September 3. The market fell backa little that day. reached a low point of378.23, and then rallied to exceed the Au-gust intra-day high, reaching 386.10. Vol-ume was again heavy, amount ing to4,439,000 shares. The next day, September4, opened with trading becoming noticeablynervous. The market began to break, fall-ing from 380.12 almost straight down to376.33. Clerks were going crazy. Theticker was nearly an hour behind but againthe market took a pause and rallied back to379.61.

The following day the exchange reportedthe previous day’s volume had reached4,692,000 shares, the highest volume for thepast two weeks. On September 5, the mar-ket rallied again, reaching 382.01 and ex-ceeding the previous day’s high. Butsuddenly it ran out of steam. Selling startedcoming from everywhere. This time themarket broke fiercely and fell straight downwith few up ticks in between. It was puremadness. This was surely a break far worsethan most preferred to remember. The in-dustrials fell straight down to 367.35, nearly8% in a single daily session. If it weren’t forthe shorts that covered for the close, themarket wouldn’t have had the strength torally by even 2 points to close at 369.77 forthe day. For the next two days that week,the market held that panic low and ralliedback, reaching as high as 381.44 on Saturdaythe 7th. It couldn’t close above 380, andfinally settled at 377.56.

The forces had Sunday to think the situ-ation through. Again the Fed talked bututtered nothing significant. As Monday the9th opened for trading, the market ralliedagain, reaching 380.57 in a desperate at-tempt to push higher. But again, nervouslongs started to take profit. The market fellback to 373.49, closing near the low at374.93.

Tuesday looked like just another day. Themarket opened and rallied, trying onceagain to push above the 380 level, but noth-ing doing. The high for the day stood at379.16 and then like the dying breath of abeaten animal, the market gave up. Sellingwas pouring in from all over. Most peopledidn’t know where they were filled until thenext day. The market had dropped belowthe previous week’s low, falling to 364.46.Volume was now rising but only when themarket declined. The onslaught continuedthat week as the industrials fell to 359.70 onFriday the 13th. The market had now tradedover 5 million shares for two days in a row.

The following week of September 16 to 21saw each day trade over 4 million shares.Monday through Friday the market hadheld the previous week ’s low, churningback and forth like a dying fish lying on thedock. The market had managed to get backup to 375.20 that Thursday but on Friday itsold off again and fell to 360.44. It was ahard battle with over 20 million shares


213

traded. But they did it; they held the 360area. Perhaps tired of the struggle, thatSaturday session was expected to be quiet.Indeed it was. Many traders, needing therest, took the day off.

Saturday was only a 2 million share day.Hardly much to write about. Nonetheless,selling persisted. To the surprise of thosewho were there, the market cracked and fellto 359.65, which was a mere fraction belowthe previous week’s low. Everyone excusedthe occurrence and said it didn’t matterbecause it was done on little volume. Howoften have we heard that excuse these days.Low volume or not, the next week provedthat that Saturday penetration was perhapsa ill-omen in itself, warning of what wouldlie ahead.

After a brief rally on Monday the 23rd ofSeptember, the market managed to work itsway back up to 365.03 but fell for the closeand settled at 359.00. Again each daytraded over 4 million shares. By Wednes-day the market had fallen to a new correc-tion low of 344.85. The market rallied againback to 358.16 on Thursday but to no avail.It collapsed on Saturday, falling to 341.03.By the end of September the market hadfallen 45 points from the 386 high on Sep-tember 3.

Roger W. Babson, famed market letteranalyst of the day, came out that Septemberand stated that the market was "riding to afall." Although after his statement the mar-ket rallied back up and people laughed,eventually he would be remembered forcalling the top.

October was merely a rerun but worse.News came out that building permits for1928 showed a 23.4% decline. Almost any-thing now seemed to be bearish and a rea-son for more selling. The Chinese started

to dump silver and that shiny metal fell to anew low since the 1920 high of $1.40, thistime reaching to 50.7 cents. This drop insilver broke the 1921 low and now barelyheld the 1915 low as silver continued to fallto 46 cents by year-end.

On the first of October, the market fell to335.99. The market was very active and todescribe the trading as nervous was defi-n ite ly an understatement as Octoberdawned upon Wall Street. October 2brought with it a relief as the market con-solidated and traders were still reluctant togive in on their battle against the FederalReserve. But the next day, the downtrendresumed, falling to 327.71 and on October4 the market fell to 320.45, off 23 points ornearly 8% from the close of September.The market rallied sharply on the 5th, backto 342.59 for an intra-day high on Saturday.The first week of October was not muchdifferent from the preceding weeks in Sep-tember but still cries from the bulls echoedthrough the halls and side streets of thefinancial district: "Fundamentally every-thing is sound, nothing has changed."

The second week of October 1929 foundthe market reaching to 348.50 on Mondaythe 7th after falling to 338.86. But in gen-eral, the market hold during this secondweek in October, rallying back as far as358.77 by Friday the 11th. The commentaryin the general press was quite confused butdefinitely still more bearish rather thanbullish. Yet, at the same time, the reassur-ance that everything was fundamentallysound remained the distinctive undertone.The Fed remained curiously silent, perhapssecretly its directors hid from the press un-der their typically institutional mahoganydesks.

Monday of the third week, October 14,opened a little lower but the market rallied


214


215

back to 358.20, closing back down at 350.97,off nearly a full 8 points from the high of theday. That was the last and fatal sign ofstrength for the month and from Mondayonward, the market fell sharply that week.Each day brought lower prices and finallyby the end of trading that Saturday, themarket fell to 321.71. Readers picked uptheir October 14 edition of Time magazineat the local newsstand and read of theshocking goings on in Chicago as margincalls were flowing in from all sectors of thenation. The story that raised more than afew eyebrows was this:

"In Chicago many gangsters, known to beheavy speculators, received margin calls,left brokers’ offices muttering threats. Dy-namite was thrown into the home of oneCharles H. McCarthy, manager of a broker-age credit department. Stench bombs weretossed into the offices of Hornblower &Weeks, E.A. Pierce & Co., Logan & Bryan.‘A new form of wolf has invaded LaSalle

Street,’ said the deputy police commis-sioner. ‘The racketeer who responds with abomb when he is called for more margin.’"It seems as though the mob was in the mar-ket in those days and when the trend wentagainst them, they weren’t very good losers.

The Dun’s Review, issued for the week ofOctober 7, stated the following: "Nothinghas occurred to indicate that widespreadtrade recession is under way and statisticsof railroad freight traffic show week afterweek, that distribution of merchandise re-mains at a notably high level.’ Indeed, thefundamentalists remained bullish. Manysigns of the economy were still quite bullish.There was no real news which indicated thatthe economy was about to collapse. Thisstill led many to look at the dip as a buyingopportunity yet the selling continued de-spite the calls from the fundamentalistswho claimed that everything was just fine.


216

Nonetheless, General Motors stock hadfallen so far since its 1929 high during thesecond week in October, that the total valueof the stock had fallen $1.2 billion. W.P.Chrysler came out just before the break andstated that he saw no reason why automo-bile stocks should drop given the presentrate of sales and earnings. But, the marketsaw no logic and delivered no mercy.

One bearish factor at this time was thespeech of Philip Snowden, British Chancel-lor of the Exchequer, which attributed therise in the Bank of England’s discount rateto the "orgy of speculation" in the UnitedStates. Many began to wonder just howmuch foreign capital was taking part in theso-called American "orgy."

Some began to recall the words of RogerW. Bobson who stated that the market wasriding toward a fall. Some brokers said thathe was always wrong and that eventually hewould be wrong again when things settleddown. Commentators blamed everybodyfrom the Fed to Bobson and everyone inbetween who even uttered a bearish note.But Yale University’s Professor IrvingFisher uttered a few words that placed hisname in history for a brief period in time.He stated: "Stock prices have reached whatlooks like a permanently high plateau."Colonel Leonard P. Ayres of the ClevelandTrust also came out and stated that month:"It seems probable that stocks have beenpassing not so much from the strong to theweek, as from the smart to the dumb." Thebears at last had a few more hats tossed intotheir side of the ring and the confidence ofthe bulls was beginning to crack.

Virtually everything and anything was get-ting hit on the slightest bit of news. Onesuch stock was Boston’s Edison Electricilluminating Co. The company wanted tosplit its stock and stockholders were all in

favour as the stock rallied to $440 a shareon the news. But the Massachusetts De-partment of Public Utilities unexpectedlyrefused to grant its blessing. Instead, itcriticized the company for everything fromits rates to the amount of dividends it paid,as well as the price at which the stock wastrading. When the news hit the market, thisstock fell to $299 a share. This was unbe-lievable, nearly a 40% decline based uponthe remarks of an overzealous state admin-istrator who took it upon himself to publiclystate: "No one in our judgement, on thebasis of its earnings, would find it to hisadvantage to buy it." This is the atmospherethat began to surround the market like theblack cloud of death in biblical stories.

The third week of October brought noreal sign of relief. On Monday, October 21,the market fell in another selling wave. TheDow Jones Industrials fell to 314.55 at onepoint during the day. Then news began tocirculate about a big bank meeting thatsome hoped would stem the wide breakwhich had taken place that morning. Theticker tape fell two hours behind and sellingturned to panic as people increasinglyfeared what they could not see and ignoredall logic and reason offered by the funda-mentalists. Selling became "blind" and peo-ple would not find out where they werefilled for hours on end. The bankers whomet that day were called to order by thefamous J.P. Morgan & Company as theygathered in their offices in Manhattan.

The banking meeting included the headsof four of the greatest banks in the UnitedStates with a combined asset power of $6billion dollars in resources. Representedwere the National City Bank, Chase Na-tional, Bankers’ Trust, Guaranty Trust and,of course, J.P. Morgan. The market heldbriefly and traders hoped that the bankerswere going to take decisive action. The


217

market traded back up, reaching as far as329.28, a 14 point rally. Later in the day, thebankers were joined by representativesfrom 30 of the nation’s leading stock ex-change houses. Then emerged Mr. Lamontfrom the renowned House of Morgan andhe assumed the role of spokesman for thedistinguished group of financiers. Thestatement that was released was not one ofearthshattering support and at first it wasmisunderstood. The bankers merely statedthat the break in the market was a "techni-cal" one and that it was not based uponanything fundamentally wrong with themarket. They explained that the marketwas merely scared and that it had run intowhat they termed "air-holes" with urgentand heavy selling being met with an absenceof sizable bids. But the tickers misreportedwhat Mr. Lamont had said and it was inter-preted as though the Fed would raise thediscount rate again.

The market was confounded as the ticker,hours behind, only intensified the panic. Noone know whether their stock was selling atthe price last reported by the ticker or if it

was 20% lower. The sheer fear of that un-known had intensified the selling as theblind began to load the blind. Emotionally,the lack of definitive prices made the situ-ation far worse than it perhaps would havebeen. Nonetheless, the real selling that daywas noted to be mostly large blocks of stockamounting to 5,000 to 20,000 shares at aclip. Many assumed it was the investmenttrusts bailing out. The day finally came toan end with the market closing at 320.91,about mid-ground between the high and thelow of the day.

With the fourth week in October startingoff with such a panic, the next day was notlooked forward to by many traders at all.The headlines continued to reflect a des-perate situation but the fundamentals werestressed heavily. "Serious Business DeclineUnlikely" topped an article in the New YorkTimes. This was merely one example ascountless worldwide stories projected thesame note of optimism. Indeed, when thenext day arrived, traders were literallyshaken by the previous day’s action as theexchange released the volume which un-

BRITISH POUND

U.S

.Dol

lar

per

Brit

ish

Pou

nd

MONTHLY: 1929


4.88

4.875

4.87

4.865

4.86

4.855

4.85

4.845

4.84


218

doubtedly had broken all previous records:6,092,000 shares had changed hands.

Tuesday, October 22 brought with it asharply higher open. The low of the day was2 points above the previous day’s closing.The market rallied straight up to 333.01 andthe roar of optimism was heard loud andclear. The market found the industrialsclosing at 326.51 that day, off nearly 8 pointsfrom the opt imist ic high of the day.Wednesday, October 23 brought the exactopposite. The market managed to rally upto 329.94 but then the pressure began tobuild. Suddenly the market collapsed andthe industrials fell drastically behind. Theexchange had released the volume for theprevious day, indicating that 4,130,000shares traded hands. Obviously, the vol-ume increased on down days and slackenedoff on days that rallied. This illustrated thatthere were still sizable long positions stillholding on in the market and that furtherpanic was not out of the question. Wednes-day fulfilled that indication in style as themarket closed down at 305.85 with volume

once again reaching a new record of6,369,000 shares.

Thursday, October 24 opened a bitstronger as the market rallied nearly 8points from the previous day’s close. Butthen again, heavy selling came into play andthe market fell to 272.32 on the Dow JonesIndustrial Index, off nearly 50 points fromthe close of the previous week. The tickerwas behind as much as 3.5 hours. The dev-astation was indescribable. The volumewas for heavier than anyone ever expectedpossible. The members of the exchangeworked well into the night and it was aftermidnight when any reliable figures could beput together. The next morning the volumewas re leased; 12,895,000 shares hadchanged hands. The volume clearly re-flected distress selling at its height.

In the October 25 edition of the New YorkTimes, the headlines read: "Weird RoarSurges From Exchange Floor During Trad-ing"..."Brokers In U proar As MarketBoils"..."Senators Stirred By Market Break- King Presses His Proposal For Investiga-

DUTCH GUILDER

U.S

.Dol

lar

per

Dut

ch G

uild

er

MONTHLY: 1929


0.4034

0.4032

0.403

0.4028

0.4026

0.4024

0.4022

0.402

0.4018

0.4016

0.4014

0.4012

0.401

0.4008

0.4006

0.4004

0.4002

0.4


219

tion Of Federal Reserve System." The arti-cle went on to report that the further col-lapse of the stock market that day caused arevival in the Senate of suggestions callingfor legislative action to curb credit forspeculation and for amendment of the Na-tional Banking and Federal Reserve Acts torestrict credit used in the stock market.

Along with such proposals, some of thesenators advocated a detailed investigationof the Federal Reserve Banking system asproposed in the pending resolution of Sena-tor King of Utah..."Today’s activities in themarket were watched with interest by sena-tors who have been expecting develop-ments that would create a sentiment notonly in Congress, but throughout the coun-try in favor of legislation to make it moredifficult for banks to lend money for specu-lation and for Federal laws to heavily taxstock transfers made ostensibly for specula-tive purposes." Senator Glass of Virginia,one of the authors of the Federal ReserveBanking Act, found in the situation thestrongest argument for pressing his bill pro-

viding for the imposition of a 5% exercisetax on sales of stock which had not beenheld for over sixty days. "It is his presentplan to offer his bill as a ‘Rider’ to thepending tariff bill," the press reported.

On the same page of the New York Timeson October 25, another article appearedpointing out the real winner in the midst ofthat panic. It was the state of New York.The state of New York earned $350,000 intax on that day’s stock sales. The taxation,which the state imposed upon the New YorkStock Exchange and the Curb Exchange,was bringing them literally millions of dol-lars in tax revenue. Now the federal gov-ernment wanted to impose taxes as well. Itseems as though laws are never goodenough. The government always takes theposition that it is far better to raise taxes asthe supposed incentive against something,rather than to actually outlaw whatever it isthat they are trying to prevent. In the end,obviously government will always be theultimate winner when it takes that sort ofapproach.


220

On another page in the New York Timeson October 25, the headline read: "Broker-age Houses Are Optimistic On The Recov-ery Of Stocks." Another article, entitled"Investment Trusts Buy Stocks Heavily,Pour In Their Reserves As Market Drops,"went on to say:

"Investment trust purchases yesterdaywere reported to have been the heaviest ofany day since the inception of the invest-ment trust movement in this country. Manytrusts which had placed scale buying ordersextending from 10 to 50 points below yes-terday’s morning opening prices were saidto have purchased hundreds of thousandsof shares. These scale orders had beenplaced under the market several weeks agoin a period when many of the trusts wereliquidating a part of their holdings.

"When the decline was most abrupt from1130 to 1230, the scale orders of the invest-

ment trusts and other interests acted as acushion for the crashing securities markets.During this interval, scale buying orderswere caught by the hundreds and severaltrusts declared after the close of the marketthat they had purchased all the stocks whichthey cared to add to their portfolios for thetime.

"The decline was so severe, however, thata few trusts complained that their scale or-ders had not reached down far enough andthat many of their purchases were made atthe higher levels prevailing before thebreak assumed its greatest proportions.One trust was reported to have been unusu-ally successful in its operations makingmost of its purchases by keeping in constanttelephone communication with its brokerson the floor of the exchange, buying in 5,000and 10,000 share blocks at the lowest levelof the day. When the stock market rallied,the trust had a paper profit on its operations


221

for the day of several hundred thousanddollars.

"The cash reserves of the entire group oflarge investment trusts before yesterday’soperations was estimated at approximately$750,000,000. More than $100,000,000 ofthis total was reported to have been used bythe trusts in the purchase of stocks yester-day. One trust, which had $30,000,000 incash on Wednesday evening, reported thatit had used only one-fifth of its total yester-day in purchasing stocks."

Obviously, the investment trusts had re-ceived sizable hoards of cash as the markethad come into its high during September.Since the market began to decline, manytrusts did not simply jump into the marketinvesting their capital upon receipt. Hadthey done so, the break could have beenseriously worse than what took place. Insti-tutional cash was actually at record highsjust prior to the October 1929 collapse.

This very same fundamental was impli-cated as the reason for the stock marketrally in 1982, and claims were made that theinstitutional cash was at all-time highs.Again fundamentally we find that the insti-tutional cash levels at the top of the marketin 1929 were also at record highs and thissimple factor of watching institutional cashreserves as a leading indicator for marketperformance does not necessarily hold aconstant relationship to the market. To thecontrary, institutional cash would logicallybe at all-time highs when a market is soar-ing to this extent. It is reflected by the smallinvestor reading the bullish headlines andsending in his cash as quickly as possible. Infact, the entire investment trust phenom-ena was exploding between 1925 and 1929and therefore from one month to the next,in effect, it always had established a newrecord high in cash during the bull phase ofthis period. Therefore, if one were to drawany assumptions from watching institu-tional cash levels, perhaps it should bemarked rises and marked steady declines.It is doubtful that this indicator will afford

FRENCH FRANC

U.S

.Dol

lar

per

Fre

nch

Fra

nc

MONTHLY: 1929


0.0394

0.03935

0.0393

0.03925

0.0392

0.03915

0.0391

0.03905

0.039


222

any loading indication but in the future per-haps it might be used as a confirmation of achange in trend following market perform-ance.

The banking statement provided thatweek by the House of Morgan was at firstmisinterpreted by the traders in the confu-sion. It was actually not until later in theweek that Mr. Lamont’s statement becameclearly understood. The New York Timesexplained this confusion as follows on the25th:

"Through a misunderstanding, reports ofMr. Lamont’s statement appearing on thenews tickers made it seem that he had saidthat he expected the Federal Reserveauthorities to take some action today uponthe stock market situation. In a later inter-view, he disclaimed all such intentionspointing out that he would hardly be in aposition, even if he should care to do so, toforecast the actions of the Federal ReserveBoard."

The crash had shaken the securities andcommodity markets worldwide. In Lon-don, the exchanges stayed open late into thenight following New York time so that in-vestors would not be left in a serious posi-tion with no way to act. Between theconfusion among public statements andwith the tickers falling 8.5 hours behind, itis not hard to imagine the intensity of thepanic during that fourth week in October.

As Saturday arrived, volume declined to2,098,000 shares, nearly half that of the pre-vious Saturday session and one-sixth of thehuge volume on that Thursday. The marketheld the previous day’s low and trading wassteady between 303.60 and 295.98. The to-tal volume for the week was 37 millionshares, more than half the entire volume ofthe previous month. On the close of Satur-day the industrials were off 88 points fromthe high of September 3, which was about23%. The railroads were off 24 points,nearly 12.5%, with the utilities down nearly28%, showing clearly that they had been thehardest hit. The bonds, however, had fallen

SWISS FRANC

U.S

.Dol

lar

per

Sw

iss

Fra

nc

MONTHLY: 1929


0.1943

0.1942

0.1941

0.194

0.1939

0.1938

0.1937

0.1936

0.1935

0.1934

0.1933

0.1932

0.1931

0.193

0.1929

0.1928

0.1927

0.1926

0.1925

0.1924

0.1923


223

to 92.10 during September and closed at92.18, which was the lowest closing since1928 high. October had also brought thebonds down, falling to 91.76 during the firstweek of October 4. By Friday, October 11,the bonds rallied sharply as the stocks de-clined, closing the second week at 92.39.But during this third week in October manywere dumping stocks, running back into thebonds and trading according to their oldfamiliar theory. The relationship, whichwas stocks down, bonds up, began to comealive again but would soon prove to be falseas the depression unfolded. By the close ofthis week the bonds rallied steadily, postinggains each day closing at 93.71.

Sunday the 27th brought welcome relief.Traders hoped that things would settledown after the news of the bank meetingshad been misreported and then denied.But the Federal Reserve had not seenenough blood just yet. After a late specialmeeting which lasted 2.75 hours, a spokes-man for the Federal Reserve emerged fromthe closed door session uttering their fa-mous statement, "No announcement." Thediscount rate would not be lowered. De-spite the denials of Lamont, traders beganto think that the Fed might tighten furtherin their battle against the market. Perhapsthe greatest of all fears was that the selling


224

might now continue when Monday openedfor trading.

When Monday, October 28 opened, theworst fears expressed over the weekendcame to a real fruition. Monday opened at295.18, which was slightly below the lows ofboth Friday and Saturday of the previousweek. But worst of all, 295.18 quickly be-came the high of the day in a very obviousmanner. The market began to plummetand now even the investment trusts beganto worry. No scale buying was seen of anyreal size. The market had encountered Mr.Lamont’s famous "air-holes" collapsing in aterrible manner. The industrials fell to256.75 and this time there was no sharp rallyfor the close as the market went out with ascreech so loud it was as if it had been dealta swift and sharp fatal blow. The roar wasreported to be so loud that it was audible onthe streets outside the building.

The railroads fell sharply and make a newlow for the month, falling to 155.07, off 20points from the high thus far for this month

alone. The utilities collapsed, falling to86.96, down 18 points from the previousday. As a whole, the broad market dropped155 in a single day! The bonds rallied againbut, curiously enough, they closed at 93.69,slightly lower than Saturday. This perhapsreflected above all that people were gettingseriously hurt and not much capital wasseen on the bid side for bonds that day.

Then came what would be known as BlackTuesday, a day that would carve its memoryinto the minds of men who would not beborn for decades to come. Monday’s vol-ume was released: 9,213,000 shares. As ifMonday’s devastation was not enough,Tuesday’s speculation that the Fed was go-ing to raise the discount rate loomed abovethe heads of the traders. People asked why,and there was little explanation that couldoffer consolation or reason for that matter.Everything was an assumption based on un-warranted rumor, but the Fed and its boardwere viewed as the assassins who were ter-rorizing the financial world. The marketopened 8 points below the previous day’s


225

close and 4 points under its lowest point ofdepravation. Again it quickly become no-ticeable that it was again the high of the day.Selling came in from everywhere as theindustrials were forced to an appalling anddepressing low of 212.33. Volume for theday was 16,410,000 shares, more than fourtimes the volume in the good old days whenthe market leaped ahead, rearing its hornsthrough the stops placed by the short play-ers.

This devastating decline was unmistak-ably no poor man’s crash. By Monday, theprevious day, G.M. had lost nearly $2 bil-lion off the total value of its 43.5 millionoutstanding shares. General Electric haddropped 120 points from its 1929 high.Westinghouse Electric crashed 194 points,American and Foreign power fell nearly112 points and even AT&T collapsed by 130points. Everything had buckled under tothe waves of mass hysteria.

But Black Tuesday had not left even someof those declines alone. On Tuesday, G.M.fell below 50 after being above 200 at onepoint, which was now off by 75%. Even thealmighty Chrysler, which had been the lead-ing automobile issue throughout the bullmarket, was now under 40, off more than100 points from just a few weeks before.The railroads had tried to resist the depra-vation before this week, but even here withcar loadings doing very well, the rails brokeseverely. The Dow Jones Rail Index, whichhad reached 190.50 in September, nowgroveled at the 142 level. Common sense,logic, reason, earnings, dividends allseemed to be fundamental excuses whichcould not muster a supporting consensus.

Perhaps the greatest indication of all,which clearly proved that this was no smallpanic and that it was not restricted to thesmall investor, was the collapse in the bank-

ing stocks. Traditionally, most banking is-sues were purchased by the wealthy andmany traded over the counter as unlistedsecurities. Here again we can see that theFederal Reserve concern for the amount ofmoney in the brokers’ loans was perhapsnot justified for the nation as a whole. Themargin for bank stocks was usually noneand those that were marginable were on a50 to 80 percent basis. There was no over-leveraged position in this market. Yet de-spite this fact, the damage which had beendone seriously affected the rich as well asthe middle class. The banking issues, ofwhich many were selling at $400 or more ashare, crashed. First National fell on the28th by $500 in a single day. Bank of Man-hattan fell $150 that day as well. In fact,sharp losses were expressed in the quota-tions for Bank of America, Chase Nationaland even the mighty National City. Otherstocks, traditionally held by the rich, werethe insurance companies, trust companiesand utilities. Here it became clear that therich industrialists, who normally paid 100%cash for their bank shares, saw their portfo-lios cut more than in half between Septem-ber 3 and October 29.

In the midst of the hysteria when peoplewatched their fortunes disappear fasterthan they had been amassed, a knight inshining armour came to the rescue. He wasJohn D. Rockefeller, American oil tycoon.Rockefeller had never been a man of muchpublic exposure, preferring to refrain frompublic statements. But he was a man highlyrespected among businessmen as well asWall Street. With the calm and steady voiceof confidence he came forward and publiclyannounced: "Believing that fundamentalconditions of the country are sound, my sonand I have for some days been purchasingsound common stocks." At last, someone ofsubstance offered to put his money wherehis mouth was, so to speak. The news hit


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the floor in the later part of the session justprior to the close. The market firmed andbegan to rally sharply for the close, settlingat 230.07, up nearly 18 points from thatday’s low of 212.33. On this day, selling ofeven investment trusts had come in butmany could not be sold for there was no bidof any price. But as the news eventuallybegan to circulate, what the bankers and theinvestment trusts had tried and failed at,only John D. Rockefeller seems to havebeen able to pull off. Here was a man of fewwords, devout patriotism and acknow-ledged business accomplishment. Despitethe numerous words from Hoover to theGovernor of the State of New York, Frank-lin D. Roosevelt, all claiming that the econ-omy was sound, it took an acclaimed tycoonnot known for speculation but for his busi-ness judgement, to provide a level of confi-dence once again.

The next day, the market opened higher,fell slightly to 230.98, still almost a pointabove the close on Tuesday, and then ralliedstraight up to 260.93, closing at 258.47.Shorts were covering but more apparent

was real buying from bargain hunters. Butm o st im p o r t a n t , vo lu m e r e a ch e d10,727,000 shares, the highest volume everrecorded on a day that rallied instead ofdeclined. The buoyant rally continued intoThursday, the 31st of October, as tradingslacked off to 7,149,000 shares. The bondshad fallen back to 93.13 on Tuesday butrallied on Wednesday to 93.52, comingclose to matching the previous week’s highof 93.83. But as the stock market movedhigher on Thursday, the bonds fell by a fullpoint, dropping for the close back to 92.11.Clearly, cash for stocks came flooding backout of the bond market as traders continuedto view the old relationship of stocks up,bonds down. The total volume for the weekwas nearly 44 million shares. The ex-change, exhausted and drained, declared athree-day holiday, ending the week on adefinite notes of optimism.

The week of October 28, 1929, had beenthe largest volume week in the history of theexchange. The backlog of work was incred-ible as October slipped into the past. No-vember began on Friday of that week but


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the market was closed and remainedclosed for a three-day holiday and did notreopen until Monday, November 4.

The week of October 28 had caught theattention of virtually everyone in world, notmerely the nation. Stories continued todominate the press during early Novemberof 1929. The Dow Jones Industrial Indexhad fallen from the 386 high in Septemberto 212 on Tuesday, October 29. But thedecline in many individual stocks was muchworse than the indexes suggested.

Montgomery Ward fell from its high of$156 to $83 while Electric Bond and Sharefell from $189 to $50. One story, whichhistory has recorded but prosperity hascaused us to forget, concerns a hero - atleast in the public’s view - from the Houseof Morgan and how he helped stem thedecline during that dreadful week.

The hero was Richard Whitney, head ofRichard Whitney & Company. He was well-known as the brother of George Whitney,who was a Morgan Partner. At 1:30 PM onTuesday, Broker Whitney stepped into PostNumber 2 and in a loud and confident voiceannounced a bid at $205 for U.S. Steel.This was 15 points above the market at thattime and soon the tickers began to flash"Steel, 205 bid." Whitney was bidding foronly 25,000 shares which amounted to amere $5,000,000. But the importance of thebid lay solely in the Whitney’s implied rela-tionship with the House of Morgan.

Despite the seemingly buoyant recoveryfor Thursday afternoon on the 31 st, manya speculator was cut down to size that week.The speakeasies were booming as rumorafter rumor depicting suicides driftedthrough the smoky back alley rooms. Per-haps the odd saying, "misery loves com-pany," was born in those dark, smoke- filled

rooms that very day. For misery certainlywas not alone. Proud boosts of how theyhad survived could be heard between thegulps of imported bootleg of the finest qual-ity. But between the lies and the exaggera-tion relating how they knew all along thatthis would be the outcome rumor andspeculation spun tales of the famous whowere less fortunate. The rumors and thegossip which told a dismal tale of suicidesbegan to turn into blatant reality.

When the week was over, estimates beganto pour out indicating that the number ofmargined positions which had been closedout ranged from 25% to 75%. The swingwithin the market that Thursday the 31stwas awesome. The decline from Mondayhad cut the total value of the New YorkStock Exchange issues by nearly $11.3 bil-lion. By the close of Thursday, all but $3billion had been recovered.

The "Banking Pool," as it was called by theend of that week, seemingly stood by readyto stem the tide should it shift toward sellingonce again. But the following weekbrought with it National City’s withdrawalof its offer to buy out the Corn Exchange.This untimely event, coupled with remarksfrom Senator Carter Glass, who chose toblame anyone and everyone for the collapsein the market, undermined the confidencein the Banking Pool.

In the Philadelphia Record, SenatorGlass, author of the Federal Reserve Act,attacked Charles Edwin Mitchell for caus-ing the crash by making optimistic state-ments. Mitchell was the head of NationalCity Bank and therefore an importantmember of the Banking Pool. SenatorGlass’s verbal assault was quoted as fol-lows: "He, more than any fifty men, is re-sponsible for this stock crash." The hostilityof Senator Glass toward Mitchell was a long


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running story in itself. But nonetheless, ru-mor circulated to the point that Mr.Mitchell was forced to come out publiclyand deny that he was going to resign.

Senator Glass had a sharp tongue andperhaps far too much pride. While the ma-jority pointed the finger of blame at theFed, Glass lashed out in defense of his crea-tion. His personal pride stood before thebest interests of the nation and instead ofconsidering that his creation could possiblybe wrong or at fault, he chose to condemneveryone from the President to Mitchell formaking optimistic statements.

As Monday, November 4 opened, the firstprint was now off nearly 10 points from theclose of October 31. The high of the dayonce again quickly formed at 269.75. Themarket fell as people began to question thevalidity of the Banking Pool. The DowJones industrials dropped to 255.43 andclosed at 57.68 with volume running at6,203,000 shares. The market was closedagain on Tuesday, November 5 and re-opened on Wednesday under the low of

Monday. The high of the day formed at252.20, more than 3 points below Monday’slow. Selling continued once again as theindustrials dropped to 228.35 closing at232.13. Volume was now 5,915,000 shares.So far, the industrials, railroads and utilitiesstill held the low of the previous week’spanic.

On Thursday, November 7, the sellingpersisted. The market opened up slightlybut rumors of Mitchell caused much nerv-ousness. The high of the day formedquickly once again at 242.10, up nearly 10points from the previous day’s close. Butthen the selling began to pour in from allcorners of the exchange floor. The marketfell abruptly falling to 217.84 holding theprevious week’s low by merely 5 points. Butthen a rally sparked by short covering un-folded and the market rallied back andclosed at 238.19 with volume reaching7,184,000 shares. On Friday, November 8,The market calmed down with volume de-clining to 3,215,000 shares, which was thelightest in nearly three weeks. The indus-


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trials traded between 245.28 and 234.63,closing steady at 236.53.

The market was closed down on Saturdayonce again hoping that time off might helpallay fears of panic. But as the speculatorshad two days to think things over, their fearswere not yet settled. As the week of No-vember 11 began trading, the dread of paniconce again gripped the market. Afteropening at 235, the market briefly reached235.13 on the open and then fell like a rock.The industrials dropped to 219.34 whichstill managed to hold above the major lowof November 7. But this time there was norally. The industrials closed at 220.39, thelowest closing yet achieved. Volume wasrelatively light with merely 3.7 millionshares changing hands.

As everyone had the night of Monday,November 11 to think things over, talkagain began to turn toward fear. The Utili-ties, which had long been viewed as the richmen’s investments, had indeed broken theprevious low and closed at 73.91. Even thebonds had declined to a small extent. This

did not speak well for what "strong" handsmay have been up to. Some asked if thedecline would ever come to an end.

As Tuesday, November 12 arrived, theindustrials barely managed to rally up to the222.56 level before falling once again. Vol-ume doubled as panic filled the minds andhearts of those that remained in the market.This time the industrials fell without mercystraight down to 208.09, closing at 209.74.The rails fell to 133.68, which was also a newrecord low for this devastating crash. Eventhe bonds fell back under the 93 level forthe first time in November.

As Wednesday the 13th opened, the sell-ing continued and the industrials reached211.92 but fell breaking the magic 200 marktesting 195.35. By the close, the industrialscouldn’t muster enough support to rally andclosed below 200 at 198.69. Volume wasagain heavy, amounting to nearly 7.8 mil-lion shares that day. The bonds fell nearlyhalf a point closing at 92.44 and the railsfinished at 128.07 with the utilities down at


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64.72. Would no one be able to stop thismarket from falling further?

At last, Washington’s long silence wasbroken. President Hoover promised a taxreduction and an industrial conference.Other heroes began to step up. JuliusRosenwald, board chairman of Sears, of-fered to cover the margin accounts of allemployees. Standard oil of New York an-nounced that it would lend $43 a shareagainst its own stock to employees whowere overmargined. Other companies be-gan to join suit such as Standard oil of NewJersey, Humble oil, U.S. Steel, Gulf oil andothers.

Although the market had forgottenRockefeller’s pronouncement that he andhis son were buying stocks of sound value,this time it would not forget. Rockefellerplaced and order to buy 1 million shares at$50 of his own Standard oil of New Jersey.This above all would make Rockefeller oneof the true historical heros of the moment.

The lists of winners and loser of the erabegan to fill the press. The plans to estab-lish a Papal Bank were abandoned as theVatican took heavy losses during this pe-riod. The State of New York was among thewinners. It had raked in nearly $5 millionin taxes of 2 cents per share for the monthof October alone.

Many losers obviously didn’t come for-ward publicly. But one such loser did. Shewas a girl of 19 named Margaret Shotwell.She told the press that she had lost morethan $1 million and even named the stocksshe had owned. The list was MontgomeryWard, Paramount, Cities Service and Gen-eral Motors, all blue-chip companies nodoubt. When she was only 12 years of age,her father had brought home a friend tolisten to her play the piano. That friend was

John Neal who upon his death left her $lmillion in stock of Reynolds Tobacco, whichshe diversified into other companies onmargin.

Others did not take their losses so easilyand the suicide lists began to grow in promi-nence as well as in number. That drop inNovember brought with it the suicide of thepresident of New York’s County Trust Co.,James J. Riordan. The president of Roch-ester Gas & Electric Co., Robert M. Searle,also committed suicide and was rumored tohave lost nearly $1.5 million during Octo-ber’s panic. In New York City, 44 suicidestook place between October 13 and No-vember 15.

The first brokerage house to go under wasMandeville, Brooks & Chaffee of Provi-dence, Rhode Island with liabilities of some$4 million. The panic had clearly cut deeplyinto the heart and soul of many who partici-pated in the market game.

But it would be wrong to paint a pictureentirely of doom and gloom. Many foreignvisitors remarked on the somewhat cheer-ful atmosphere that curiously surroundedparts of the marketplace. Jokes of all sortswere heard for each new devastation. Somewere clean while others were just plain sick.Actor Eddie Cantor told the press thatwhen he heard that Rosenwald was offeringto cover the margins of his employees atSears, he immediately sent a telegram toapply for a position as office boy. Throughit all there was some sipirit left and obvi-ously not all were wiped out by this firstcrack in the market.

On the streets of New York, one could buyfor $3 the news letter of Roger W. Babsonwho cashed in on his market call for a break.Although Babson had called for a break ofonly 60 to 80 points and the market had


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fallen more than 186 points, he was, none-theless among the very few that at leastcalled the direction correctly. That was notthe case for most analysts. One such ana-lyst, Charles Amos Dice, was a well-knownbull and many followed his lead through thebull market. In October he published "NewLevels In the Stock Market" in which heclaimed that the market would remain atnear the current levels and that the Dowwould hold the 300 level on the industrials.Mr. Dice is not remembered by many in thisday and age.

Between Hoover and Rockefeller, some-one did step in to save the market that week.Although it was not a Friday, November 13,a Wednesday, would stand as the low for thePanic of 1929. The Dow Industrials, afterclosing that Wednesday below 200, openedabove it on Thursday the 14th. The low ofthe day dug itself in at 205.61 and by the endof the day the market closed at 217.28 afterreaching a high of 219.49, up nearly 10% ina single day. Friday brought more of thesame as the market gapped up even higher.The low of the day was 222.50 and the mar-ket pushed upward testing the 232.77 leveland falling back to 228.73 for the close.After reaching 7.8 million on the Wednes-day panic, volume remained respectablebut did not exceed levels of recent downdays. Thursday reached 5.5 million and Fri-day’s volume was merely 4 million shares.Curiously enough, the bonds continuedlower on Thursday when the stocks beganto recover. They closed at 91.93 but man-aged to rally back for a close on Friday at92.03.

The market remained closed that Satur-day as the exchange attempted to restricttrading to a five-day week. In part, the haltin the decline was helped by the Fed cuttingthe discount rate from October’s cut to 5%back down to 4.5%. This level would be

maintained through the balance of 1929and no further cuts would come from theFed until February of 1930.

On November 18, 1929, Time Magazinereported on its opinion as to the cause ofthe crash. It appeared as follows:

"Why the Crash come on October 23,1929, is as mysterious (and as unimportant)as why the World War chanced to begin onAugust 4, 1914. If some trace the War nofurther than to an archducal assassination,then others might trace the Crash to a vari-ety of such moments as that when GoldmanSachs terminated the syndicate on theirBlue Ridge investment trust. Vital point isthe undermining of popular confidence thatended in the Crash. Causes of underminingwere:

1) Warnings from the Federal ReserveBoard and other prophets of disaster warn-ings that scoffed at when given, neverthe-less filled the Market with a conviction ofsin.

2) A period of almost two months (sinceBabson Break early in September) in whichit had taken strych-nine-injections to pushquotations ahead. The September slump(currently almost ignored in favor of thepeculiar theory that the Market crashedwithout warning) was of tremendous im-portance in its indication that a Marketwhich could survive only by constant riseshad reached the limits of its climb.

3) Most important of all indications of aslowing tempo in U.S.industry. The motorstocks, for example, had long since fallenfrom their January highs..."

While Senator Glass tried to blame thecrash upon those who spoke "too optimisti-cally" thereby inducing others to throw their


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money into the market, Time has taken theopposite view. Time pointed to all thescorn and the jaw-boning of the Fed thateventually undermined the confidencewithin the market and the nation. Time wascertainly correct in pointing out that by Sep-tember there was a small indication thatindustry was perhaps entering a slump. Al-though steel production was declining, itwas certainly not a major leading indicator.However, the motor stocks indeed did peakin January as Time reported. This was per-haps a better technical warning since themotor stocks were the leaders all the wayup. In fact, the bull market had been builtupon the innovation of the automobile in-dustry. From our sense of the importanceof technical patterns, the true key for any-thing tangible is the fact that the strongleaders had peaked in January. Thebroader market, in fact, continued higherinto September. But these were the highlyspeculative stocks as well as the stocks thathad lagged for years.

Time Magazine went on in its article ofNovember 18 to discuss the three main

thoughts at the time from the economicviewpoint. It reported at follows:

"ECONOMICS. Apart from the ‘causes’of the break, many an economic point wasmade apropos the break. Three widely dis-cussed points were:

1) That corporations which had loanedmoney ‘on call’ to speculators had contrib-uted more than any other group to an un-sound financial situation because many acorporation promptly called in its loan atthe first sign of trouble. Five directors ofone corporation threatened to resign lastweek if their company should call its loan.These directors took the honorable posi-tion that having once loaned its money tothe stock market, the corporation shouldstand by the market so long as its loan wasadequately protected by collateral.

2) That speculation had been encouragedby the over-conservative financial reportsof corporations. There have always beendishonest concerns which rig their books toshow $1 per share profit when actually there


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was no profit. But suppose an ultra-conser-vative concern, by scaling its assets to mini-mum and car rying the l iab il i t ie s a tmaximum, shows a $1 per share profit whensomeone else thinks they might presumablyhave shown $2 per share profit; then theincentive to imagination and hence specu-lation is great and obvious.

3) That wide-spread distributions of stockto employees have made hundreds of thou-sands unduly ‘stock-conscious.’"

Obviously, in a serious situation like thePanic of 1929, people go around blamingeveryone else but themselves. Granted thecorporations dumped tons of money intothe call money market where rates rose ashigh as 20%. But did anyone think twiceabout running into their money-marketfunds in 1981 when rates there far outpacedthe time deposits at savings and loans?Well, time deposit rates were 2% at thattime. Why wouldn’t anyone in his rightmind not move funds to the call moneymarket when he could earn five to ten times

what he could at the bank time rates? Thisis hardly an excuse for the crash.

Nor can one pin the blame upon corpora-tions over or underestimating profits. Thebig companies were pouring out dividendslike there was no tomorrow. Granted,there were undoubtedly some fraudulentpractices, but this was certainly not the casefor the majority and consequently wouldnot have sparked such a rally to begin with.

Finally, trying to pin the blame on compa-nies that provided stock plans for their em-ployees is absurd. Virtually every majorcompany has had a stock plan in place forthe past 50 years and no major bull-feverhas broken out.

The causes of this devastating collapsecould not be assessed just at this point intime. By year end, most would actually be-gin to believe that the worst was over andthat prosperity would remain intact.

As the final week in November draw themonth to a close, the market began to firm.


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The week of November 18-22 saw the in-dustrials trading between 222.93 for thelow, rallying back to 250.75 by Friday andclosing the week at 245.74, up nearly 18%from the low established on November 13.Volume was far from heavy. Thursday the21st was the peak on volume, reaching only3.1 million shares. The entire weekbrought light volume totalling only 14.5million. During the previous week whenthe low had been established, volumereached nearly 22 million shares with themarket open only four days instead of five.Clearly, not much fresh buying was honestlyentering the market.

The rails managed to firm as well, rallyingback to 149.48 by the end of the week. Thebonds also rallied, closing back above 93 onFriday the 22nd. Although the marketseemed to firm, caution was still most as-suredly in the wind while dry cool jokescirculated around the floor.

The final week in November was a shorttrading session. The market began to dipback, falling from the previous week’s high

of 250.75 to 234.51 on Tuesday the 26th.The industrials managed to hold but againvolume increased to 3.6 million shares thatday. Clearly the signs were still indicatingnervousness. The market firmed and ral-lied back on Wednesday, reaching 240.66and closing November at 238.95. But vol-ume was down to 2.4 million shares. Therewas undoubtedly a distinct trend that updays brought low volume while down dayscarried on increase of nearly double thevolume. The bonds rallied and closed thatweek at 94.05 on news of Hoover’s impend-ing economic conference.

"I will appreciate it if you would make itconvenient to attend a small conference inmy office on Thursday morning at 10o’clock to discuss matters connected withmy statement of last Saturday."

Herbert Hoover

The markets were closed. The wholeworld waited to hear a few words of opti-mism and some decisive plan to stem thepanic and save the nation. History chose to


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place a lot of the blame upon HerbertHoover and in the depths of depressionshanty towns were eventually named"Hooverville" across the land. But the factsare clear that Herbert Hoover attemptedactions and sought pledges from industrywhich would, under normal conditions, fun-damentally provide a logical, supportiveoutcome. But fundamentals never predictthe future and economic solutions seldombring what they are supposed to deliver.Speculation is perhaps a mere shadow ofexpectation thrown forward upon the roadwhich extends into the future. But thenagain, without confidence, there is nospeculation.

The pledges that Herbert Hoover ex-tracted from industry were real and funda-mentally sound. Leading employers madethe commitment that there would be noreduction in wages. Labor representativespledged that there would be no strikes, noundue agitation for higher wages. TheU.S.Chamber of Commerce promised toform a permanent national economic coun-cil to deal with the current emergencies.

From industry and the railways, Hoover ex-tracted promises that expenditures on im-provements and expansion would goforward. Congress pledged bipartisan sup-port for Hoover’s plans to reduce taxes bysome $160 million. The Treasury Depart-ment pledged to increase its public buildingprogram from $248 million to $423 million.From the Interstate Commerce Commis-sion, Hoover demanded prompt action toallow railroad mergers in an effort to insurefinancial security through this consolida-tion that many sought. Hoover also de-manded that the Subcommittee award 15ocean mail contracts by January, whichwould require $200 million in new shipbuilding. Even New York City pledged tospeed up a $1 million contract for new con-struction. And from the Federal Reserve,Hoover demanded easy credit.

These were among the few lists of pledgesthat Hoover obtained during that lost weekin November. But history still chooses tocast much of the blame upon this man forthe Great Depression that eventually fol-lowed. Yet Hoover’s actions were clean


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and swift. They were positive steps towardincreasing employment immediately. Yetthere was something that didn’t quite get tothe point. There is a lot to be said forconfidence. With it, the future can bemolded and shaped, but without it, the fu-ture will mold and shape the events of man.

The meeting with Herbert Hoover thatweek was by far the most dramatic gather-ing in the history of American business.Friends, foes, and bitter competitors allgathered in common harmony to place theirpledges upon the President’s desk. Therewere many who naturally scoffed at thePresident from the ranks of the oppositeparty in Congress. This brought many edi-torials that demanded Congress to go homeand leave the nation in the hands of Presi-dent Hoover. Perhaps we will never knowif that political bickering was the cause forthe continued decline in confidence. Butthere are many times when politicians, whoseek to strengthen their own positions,thrash out at a President with politicalrhetoric, which undermines not merely the

President but the nation. It is a rare politi-cian indeed who honestly thinks first of hisnation and last of his own political career.

Henry Ford was one such attendee thatday in Washington. When the meeting wasover, Mr.Ford handed out a prepared state-ment giving his opinion of the situation. Themarket break he attributed to two causes:

1) "There was a serious withdrawal ofbrains from business by men who wouldotherwise have been working out better de-signs for commodities and better methodsof manufacture and planning to put morevalue into their products.

2) "American production has come toequal and even surpass, not our people’spower to consume, but their power to pur-chase."

Henry Ford also offered his solutions,which were as follows:


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1) "Putting additional value into goods orreducing the prices to the level of actualvalue.

2) "Starting a movement to increase thegeneral wage level."

Ford’s ideas did not exactly agree withthose of President Hoover. The Presidentwas concerned about maintaining wages aswere many business leaders. Ford soughtto increase wages assuming that they wouldincrease buying power. Ford returned andraised the wages of his employees.

Ford’s ideas were a bit strange in somerespects. Although there was not a seriouswave of resignations from men choosing tobecome traders rather than work, manyviewed the market as the easy road toriches. However, this could not be con-strued as a reason why the market crashed.But Ford was correct that production hadreached levels requiring foreign marketsbecause domestic markets could not absorball the goods. Inflation on luxury items hadrisen significantly and this was true in many

other areas as well. Thus, his suggestion toreduce prices to the level of actual value ina sense meant to reduce inflation.

The basic assumption at that time was thatprevious breaks in the stock market hadnormally prompted caution among thepopulation, which in turn caused many tocurtail spending out of fear for their futuresecurity. This occurrence is a natural eventwhich Hoover clearly understood but hefailed to prevent that natural sequence be-cause it is something that belongs in therealm of human nature.

Nonetheless, his tactics are still employedin politics for both points of view. PresidentCarter went on TV to state that he wasserious about inflation yet no one listened.People often have made up their own mindsand ominous or optimistic statements havelittle lasting effect unless the people them-selves foresee the same conclusion.

When President Reagan was elected,spending in the private sector immediatelydeclined. Expectations of future inflation


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declined and savings began to rise. Much ofthe credit for stemming inflation does notrightfully belong to the Federal Reserve ordirectly to actions taken by President Rea-gan. The curbing of inflation took place

because of the natural human instinct thatdictated Reagan was serious about stoppinginflation. People did not take Carter or theFederal Reserve for that matter - seriously.It was the election of a new President thatshifted the anticipation factor within allAmericans to expect that perhaps some-thing different was going to take place.

This is the very same thing that Hooverwas up against. He sought to get commit-ments from the private sector that theywould not cut back out of fear but insteadcontinue as if nothing had happened. Per-haps what President Hoover was askingfrom the people was something that wasimpossible to obtain. When it comes tomoney, people are very reluctant to spendtheir savings when they sense a change inthe mood or anticipate uncertainty in thefuture.

For days the press reported numerous listsof cities such as Camden, New Jersey whichpledged to employ 60,000 men in its city,county and federal building plan. The mar-ket during December remained cautious,yet firm. Monday, December 2 closed at241.70, up only slight ly following theHoover conference. Yet by the end of theweek, Friday, December 7. closed at 263.46.up nearly 10% on the week. The bondscontinued to climb, closing that week at94.57.

Friday, December 7, was the highest dailyclosing for the entire month. Monday, the9th reached 267.56 for the highest intra-daypoint that month. But from then Decemberwould decline to 226.39 on Monday, De-cember 23. After Christmas passed, themarket rallied back to close that infamousyear of 1929 at 248.43 on the industrials,well below the psychological 300 level,which was supposed to be lasting support.

PASSENGER CARS

mill

ions

Yearly: 1918-1929

1918 1925

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0


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As expectations of 1930 began to takeform, many viewed that it would be a quietyear for the stock market. The value of aseat on the exchange sold that Decemberfor $350,000, down $144,000 from the pre-viously recorded sale.

Perhaps one false investment concept thatmany were led to believe in 1980 was thatdiamonds have always hold their value.That statement on the part of merchantsseeking to lure investors into their marketplace should be considered in light of De-cember 1929. Then in Amsterdam, buyersliterally could not be found at the famousTulpstraat and at the Saphartistraat. Thework week in this diamond cutting centerwas itself cut from six days to three. InAntwerp, which was the largest diamondcutting center in the world, 15,000 cutterswere unemployed. All operations wereclosed between December 7 and 21 in Lon-don, the final source for 90% of all whole-sale diamonds. Then the dealers in Londonsuspended all sales to trade in an effort tohelp stabilize prices.

Diamonds, which supposedly were for-ever, fell in value by more than 50% follow-ing the trend of the stock markets aroundthe world. The only difference betweendiamonds and stocks was the total non-liquidity. At least most stocks could be soldfor the current bid. But in diamonds, therewere no bids unless at destitute levels. Andat times during the next two years, dia-monds of investment grade, which werelarger stones, fell more rapidly than eventhe stock market.

In the oil industry, a price war continued.The price of oil declined, threatening jobsand earnings of the top oil producers as thewar between European and American pro-ducers escalated into harsh public state-ments from both sides of the Atlantic.

1929 would remain in the minds of menfor decades if not centuries in the future.We all know now that the situation wouldget worse and that this break was merely thefirst stumble for a bull that had grown largerthan any generation before it. But how andwhy the market would drop remains of vital

US TRADE BALANCEpercentage change

1901 1908 1915 1922 1929

2

1.8

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8


240

PRODUCER PRICE INDEXannual rate of change

1901 1906 1911 1916 1921 1926

0.4

0.3

0.2

0.1

0

-0.1

-0.2

-0.3

-0.4

Consumer Price Indexannual rate of change

1900 1904 1908 1912 1916 1920 1924 1928

0.2

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08

-0.1

-0.12


241

importance to us in trying to understandwhat the future will shape as we travel ourown path on that road to a meeting withdestiny.


242

As 1929 came to a bitter end, everyone wasstill trying to sort out the facts from the

fiction. Had the market indeed risen toheights that could not be justified? Whatcaused the rally and was the correction intoNovember 13 merely a pause in the long-

term trend? Would the actions of men suchas President Hoover, Rockefeller andRosenwald stem the tide and restore pros-perity once again? These are but a fewquestions that plagued the nation as well asthe financial community. In addition, manyworried desperately that the destruction inthe stock market would spill over into thegeneral economy. As 1930 dawned uponthe chaos that man had brought down uponhimself, optimism still ran high that all theprominent men of the day clenched withintheir fists the power to command the future.

National City Bank released a survey onbusiness and its earnings for 1929 com-pared to those of 1928. Although the surveyissued during the latter part of January 1930was incomplete, it was a fair analysis of the

situation, which included 806 companiesfrom the American economy. This reportdemonstrated that there was an overall gainof 12.5% in corporate earnings for 1929above the preceding year. The report wasalso broken down into industry groups,

which are still of interest to us today. Thelargest benefactor during 1929 was theamusement companies, which posted a gainin earnings of 85.6%. The steel and ironindustry also reported earnings up 70.7%.Next on the list was the shipping industry,which reported earnings up 67.3%.

There were definitely losers as always.Surprisingly, these included the automobileindustry, which was down 10.2%. Fertilizercompanies were off 21.1%, while the sugarindustry reported a drastic decline. In 1928,the sugar industry posted earnings of $5.3million but in 1929 that turned into a deficitof $1.5 million.

During 1929, a total of 38 U.S. corpora-tions had paid out dividends in excess of $10


243

million. This was a sizable figure in thosedays and if adjusted to current dollarsthrough the official government CPI, itworks out to be in the neighborhood of $200million+ in 1985.

The biggest dividends for both 1928 and1929 were paid out by General Motors. In1928, G.M. paid $165 million in dividendswhile in 1929 that was reduced to $155 mil-lion. Below is a partial listing of a few se-lected stocks and the total amounts ofdividends paid out during 1929 comparedto their previous year. The amounts ex-pressed below are given in millions of dol-lars.

CORPORATE DIVIDENDS

Company 1929 1928

General Motors $155.0 $165.3

AT&T 116.0 103.8

U.S. Steel 63.0 49.8

Du Pont 60.1 49.6

Stand Oil NJ 46.7 36.5

Kennecott 43.9 32.9

General Electric 43.2 42.2

Anaconda 42.7 14.4

Standard Oil Ind 40.0 32.4

Consolidated Gas 34.8 23.9

There is no doubt that 1929 was a year ofspectacular economic growth. In the after-math yet to come, many companies in-creased their dividends in an effort to try tosupport their own stocks. But logic andfundamentals did not prevail in the monthsthat lay ahead. As a result, many companiesexpended cash that otherwise should havebeen retained. Dividends rose in manycases while earnings declined. The increasein corporate dividends was not truly war-ranted and they failed to provide psycho-logical stability in the market.

The reasons for the Crash were difficultto put a finger on at this point and indeedarguments would fester for years if not dec-ades to come. Nonetheless, during the firstquarter of 1930, most believed that theCrash of 1929 was a short-lived situation. Anumber of well-known analysts pointed tovalue and earnings as reasons why the mar-ket was fundamentally sound. But perhaps


244

the losses were too great and traders simplylacked nerve. Nonetheless, it is significantthat the auto industry had built the bullmarket with spectacular earnings and ex-pansion during the early to mid-1920s.Even the assembly line innovations devel-oped by Henry Ford helped improve otherindustries as well. But take a look at thetable above on corporate dividends. G.M.was the largest producer of dividendsthroughout the raging bull market, yet 1929was a year during which G.M.’s earningshad declined and this was counter to thegeneral overall trend of corporate America.It is also important to remember that G.M.peaked in early 1929 well in advance of thebroad market. This is something we shouldcarve into our brains. When the leaderspeak yet the broad market continues tocharge off into new highs, a major top is nottoo far away.

The Boston News Bureau chose to lookupon the stock market in a very unique wayat that time. The Bureau attempted toprove that the decline during the last quar-ter of 1929 was merely a correction and that

the market remained fundamentally soundand stocks were far from actually beingovervalued.

The Boston News Bureau devised amethod of judging what they termed"equivalent value." For General Motors,for example, they took the 1923 high of$17.50 and followed this stock up to 1929through various forms of analysis. G.M.went through a reverse split. One newshare of G.M. was given for four old shares.This reduced the outstanding stock to onequarter. Then G.M. declared a 50% stockdividend, which was later followed by a twofor one split which doubled the outstandingsupply. Then this was followed by a two andone-half split. Therefore, the Bureau ven-tured that the 1929 low was $168.375 butthe equivalent value was actually $672 interms of the original shares of 1923. Ofcourse, this didn’t mean much to the personwho bought G.M. after all the splits.

This exercise in numbers basically con-cluded that although the market had fallenby nearly 50%, it was still substantiallyabove the "equivalent" values for 1923. Be-low is a listing of some selected stocks illus-trating the 1929 low point for the Crash andthe Boston News Bureau’s "equivalent"value.

Stock ’29 low BNB/eq ’23 high

Allied Chemical 197 197 112

American Can 86 516 107

AT&T 193 193 128

Anaconda 70 70 53

Atlantic Refining 30 120 160

Baltimore & Ohio 105 105 60

Du Pont 80 560 148

General Electric 168 672 202

General Motors 33 63 17

Intl Harvester 65 260 98

Kennscott 49 98 45

Montgomery Ward 49 49 26


245

Otis Elevator 195 390 153

Radio Corp (RCA) 26 26 4

Standard Oil NJ 4 8 48 44

Studebaker 38 95 126

Union Carbide 59 177 67

U.S. Steel 150 210 123

Woolworth 52 313 290

*fractions have been omitted from the above

quotes for highs and lows.

There is no doubt that the market heldabove the peaks of the 1923 period. Therewere selected stocks that still retained theirvalue on a long-term basis even in thedepths of the Crash in late 1929. But wasthis significant? Did this prove that the50% decline was merely a reaction, a pausein the long-term uptrend? Would the mar-ket in fact rebound if the Fed lowered thediscount rate back to 3.5%? Was it truly thatsimple?

Many believed in this line of thinking.They viewed that stocks had reached a ma-jor low back in November of 1929 and thatwith an easing on the part of the Fed, themarket was now ripe for a rally during thefirst quarter of 1930.

Professor Irving Fisher of Yale Universitystated that he believed that the market hadreached a new plateau. He wrote a bookentitled the "Stock Market Crash and Af-ter," which was published by MacmillanCompany on December 15, 1929 and copy-righted February, 1930. The title impliedthat he had assumed that the decline wasover. Professor Fisher’s analysis was strictlyfundamental and explored the various waysof looking at the market from dividends andearnings in comparison to price. He con-cluded that everything substantiated thefact that the market was basically sound andthat reason for optimism did in fact exist.But curiously enough, Professor Fisherended his book with these words:

"As a means of further present reassur-ance I trust that the book itself will be ofsome use, besides affording substantial rea-sons for practical optimism for the future.

"The only ‘fly in the ointment’ is the dan-ger in a few years of gold shortage and longgradual deflation like the deflations afterthe Civil War and after the NapoleonicWars. And even this danger may be avertedif wise banking policies and gold control areadopted in time. For the immediate future,at least, the outlook is bright."

Perhaps Professor Fisher couldn’t havebeen more incorrect. The immediate fu-ture was far from bright. Optimism ranfairly high during the first quarter of 1930and most subscribed to the concept that themarket remained fundamentally sound.But let us give credit where credit is due. Inthe end, Fisher’s "fly in the ointment"seemed to bring along with it a number offriends. The long protracted deflation anda gold shortage indeed developed, whichturned Fisher’s optimism to cold hard pes-simism.


246

From the depths of the panic in late 1929,the market began to recover movingthrough the first quarter of 1930. From theNovember 1929 low, the railroads had man-aged to climb back up from under the 130level to nearly 158 by March. The rails hadfallen hard during the panic of 1929 fromnearly the 190 level to slightly below 130,coming close to scoring a one-third decline.December 1929 had closed lower than No-vember but it held above the 142 level.January and February had both closedhigher than the previous month and byMarch, the rails had regained about half ofthe loss from the peak of 1929 to the No-vember low. In technical terms, the firstquarter of 1930 was clearly a 50% reactionand nothing more.

The industrials, which had peaked at 386in 1929 and had fallen during the panic toslightly below the 200 level, came close toreaching 300 once again but stopped a littleshy of that key level by March. The indus-trials had fallen nearly 50% during thepanic of 1929 and the first quarter was

clearly a rally which retraced 50% of thelosses incurred during the panic of late1929.

The bond market had moved counter tothe trend in the stock market during late1929. This was caused by the old school ofthought which professed that investors buybonds while gamblers buy stocks. There-fore, the initial urge of capital was indeedto run back to bonds from which it had fledbeginning in January 1928. But despite asevere decline in interest rates, bonds even-tually collapsed as public confidence gaveway moving into 1932.

January and February were rather dullperiods at first as the stock market tried topick itself up from the trough of devasta-tion. It was in March of 1930 when the callmoney rate had declined back to 2%,clearly displaying that the demand formoney from the speculative aspect of themarket had dwindled. The bonds soared ina straight and abrupt fashion during March,rising from 94 to slightly above 96. In thosedays, 2 point moves were still far from com-


247

monplace during the course of a singlemonth.

The bonds remained steady during Janu-ary and February despite the Fed’s cut inthe discount rate during February from4.5% to 4%. But then in March, the bondswere aided by a second cut to 3.5%. Herethe Fed had cut the discount rate from 6%to 3.5% in just seven months in an attemptto halt the drastic decline in the economy.Interest rates literally plummeted straightdown during the first quarter of 1930, buteven this rapid retreat by the Fed did notprevent the retribution it seemed destinydemanded.

The opinions of the market were stilloptimistic, particularly during March. Witheasing on the part of the Fed and a Presi-dent who was trying desperately to preventa decline in economic activity, many feltthat the November 1929 low just had to be"THE" low. But despite the fact that firstquarter earnings were expected to bemixed, there was a decisive weakness thatmany perhaps refused to admit. That weak-

ness could be seen in the sharply lowerlevels of volume.

By February 1930, the depression in theluxury industries widened. They were thevery first to make the hard-hit list. Behindthe diamond dealers, the fur industry suf-fered badly. Within three months of theSeptember high, fur prices began to tumble.By January 1930, furs were off 35% andcontinued to decline. By February, whole-sale prices had dropped 50%. The only furswhich seemed to hold relatively unchangedwere raccoons, largely due to the normalseasonal demand.

Another industry in which stocks werevery hard-hit was the new and upcoming"air stocks." The airlines were not the biggiants of today. This was the new, riskyindustry that had ridden on the tails of theautomobile industry. The total combinedvalue of the air stock group in 1929 was$1.16 billion. That was the value the markethad placed upon the outstanding issues ofthis industry. But by January, the marketwhich gaveth, tooketh away. As 1930 be-


248

U.S. CORN PRICES

Date

Per

Bus

hel

(per Bushel)

1861 1871 1881 1891 1901 1911 1921 1931

240

220

200

180

160

140

120

100

80

60

40

20

0

U.S. WHEAT PRICES

Date

Per

Bus

hel

(per Bushel)

1861 1871 1881 1891 1901 1911 1921 1931

360

340

320

300

280

260

240

220

200

180

160

140

120

100

80

60

40


249

gan, this group of stocks was valued at only$284 million by the marketplace.

The air industry began to regroup during1930. United Airlines was formed at this

time by a merger of Boeing Transport withNational Air Transport. TWA came forthfrom the merger of Transcontinental andWestern Air. American Airlines was bornout of a merger of Robertson Aircraft andErrett Cord, the founder of Auburn Motorsand producer of the first front-wheel drivecar named the Cord. This age of mergersamong the airline companies helped pre-serve that industry by cutting costs and shar-ing assets, which enabled it to survive theGreat Depression that followed.

In January 1930, Irving Fisher began tochange his tune shortly after his book hadgone to the publisher. At a meeting calledby the State of New York seeking to reviseits utility laws, Professor Fisher was calledupon for his opinion. Fisher admitted thathe had not studied the utility industry andas such was unprepared to render an opin-

ion. But he made a little speech, which didmanage to hit the press. He was quoted asstating: "The U.S. is headed toward a periodof business depression, probably beginningwithin the next two years, which may exceedthat which preceded the War...The onlything that will save us is a new gold policyor the discovery of a new process or addi-tional gold fields. If the fall of gold produc-tion is not prevented by design or accidentwe shall throttle business, wringing out allprofits and experiencing all the evils of de-flation."

Professor Fisher’s prophecy in fact cametrue. But whether or not increasing themoney supply, which in effect was increas-ing gold production, would have preventedthat deflationary cycle is highly unlikely.

The downward momentum of the econ-omy was incredible. Can you imagine aperiod of less than two quarters in whichsteel production utilization dropped from95% to 60% of capacity in such a short timespan? The severity of this decline was sharp


250

and clearly an omen of things yet to come.By January, Century Fox, the motion pic-ture producer, went into receivership.

Commodities continued to decline invalue from one end of the spectrum to theother. Magnesium, which was produced byDow Chemical, had fallen from $5 a poundto 48 cents. Z inc fell moderately in com-parison from $6.70 per ton to $5.40. Thosewho would have liked to blame the entireevent upon the stock market and the fever-ish speculation of the era would have a hardtime explaining the drastic decline in com-modities at this early stage in the game.

Cotton, which had rallied to 44 cents dur-ing the 1919-1920 inflation period, had re-mained in a long depressed bear marketsince the major high at $1.90 during theCivil War in 1864; it had fallen sharply intoearly 1922, dropping to 11 cents. But duringthe initial stages of recovery, cotton man-aged to rally back to 37.5 cents in 1924. Butfrom then on, cotton declined steadily. Itreached a temporary low in 1927 and ralliedbriefly when the Fed cut the discount rate

to 3.5%. But when that intervention clearlybecame temporary, cotton turned down-ward very sharply from its peak in 1928 at24 cents. 1929 saw cotton fall back to 18cents during the November panic, but thefirst quarter in 1930 was not much of arecovery for cotton. The high for 1930 was19.5 cents and from April on, cotton plum-meted, dropping by year end to 12.5 cents.By 1932, cotton would fall to 5 cents, barelyholding the major low of 4 cents which hadbeen established way back in 1845.

Copper was one commodity which hadresisted the downtrend. While wheat wasdown 15%, silver off 16% and lead off by13% from mid-1929, copper had remainedsteady at the 18 cent level. But during thefirst quarter of 1930, copper fell to 14 centsin a single move. Now even this commoditywas off 22% from the mid-1929 level.

The first quarter of 1930 was filled withmixed news about U.S. industry. But inEurope, one man who would eventuallyleave his mark on the depression was hardat work trying to expand his monopoly. Ivar


251

Kreuger and his Swedish Match Co. pro-posed to lend Germany $125 million at 6%in return for a German monopoly onmatches. The proposal stirred up quite afuss. The Finance Minister warned that ifthey did not accept the loan, Germanywould suffer a 273 million mark deficit.The proposal was accepted on a vote of 240to 145. Everyone believed that Kreugerwas one of the richest men in the world, afallacy that would later help the depressionbring prices down even further once hisschemes were finally revealed.

In London, the markets were nervousindeed. However, a well-known local bro-ker wrote to his clients in his newsletter thatshocked the Br it ish financia l estab-lishment. The broker was Oswald T. Falk, amember of the distinguished London houseof Buckmaster & Moore. Falk actually ad-vised all of his clients to sell their entireholdings of British stocks and buy those ofthe United States or perhaps even somecolonial enterprises in Canada. His com-ments are still as interesting today as they

were shocking to those who read them then.He stated:

"I believe that the industrial prosperity ofEngland is much more than temporarilydepressed, and that we are some way downthe road of a long decline, at the end ofwhich we shall find our relative industrialposition entirely different from what it wasin the 19th Century... I would sell the sharesof almost all British industrial companiesoperating at home, particularly the sharesof the older industries.

"I believe that the economic, political andclimatic advantages of the U.S. and Canadaduring the next few decades will be so over-whelmingly great that these countries offerthe most attractive field for investment.There is room for immense expansion andthe desire for it. Wealth is the main objec-tive, the pace will be hot, and the profithigh.

"I think it is quite wrong to believe that thecurrency chaos of the last ten years will nowbe replaced by a long period of calm stabil-

BRITISH POUND

U.S

. Dol

lar

per

Pou

nd

1919-1933

1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933

5.2

5.1

5

4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3

3.2

3.1


252

ity similar to that of the 19th Century. Onthe basis of this view, I would invest a largepart of any fund in the strongest currency inthe world, the American dollar."

You can imagine that what Mr. Falk wrotewas shocking coming from such a distin-guished house. Some literally called himmad, others a traitor. But the feeling thathe absorbed from the market was uniqueand pure. Although Britain would maintainthe facade of the gold standard until Augustof 1931, the actions of the pound thereafter,falling from $4.86 to nearly $3.10 by No-

vember 1932, clearly support the keen ob-servations of Mr. Falk.

Indeed the manipulation of the centralbanks under the leadership of BenjaminStrong, Governor of the New York FederalReserve, came to a bitter and devastatingend. For all the intervention and manipu-lation could not support foreign currenciesperpetually and prevent the dollar from ris-ing once again. When that facade caved in,it did so with style and with more abrupt-ness than if the central banks had left the

free market alone in the first place. Curi-ously enough, although most politiciansagree that protectionism was a major errorwhich caused the Depression and must beavoided in the 1980s, they fail to see howthe manipulation of foreign exchange andinterest rates disrupted the marketplaceand increased volatility.

Although the U.S. stock market had de-clined sharply from the 1929 high, Falk’srecommendation was not such a bad call.All stock markets fell sharply but as thepound fell, even declining U.S. stocks rosein terms of foreign currencies. Falk had theamazing insight into the future and his per-sonal pride as a Brit did not stand in his wayof stating what he believed would be thefinal result. He had the foresight to seethrough the artificial value of the pound,which had been achieved through centralbank intervention. In his mind, it was onlya question of time before the natural forceswould take hold. The decline of the Britishindustrial era began with alarming proxim-ity to the forecasts of Oswald T. Falk.

Great Britain - Gross Domestic Product


Ann

ual R

ate

of C

hang

e

market prices in billions of pounds

1901 1906 1911 1916 1921 1926 1931 1936

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08

-0.1

-0.12

adjusted into 1980


253


254


255

The foreign stock markets had actuallypeaked shortly after the central bank inter-vention. In France, the stock marketpeaked near 550 on the index during Feb-ruary, 1929. By late 1929, this market fellto 475. The Swiss market peaked duringSeptember of 1929 at 250 and fell to 215 byNovember of 1929. In Britain, the stockmarket peaked during April, 1928 at 165and by November, 1929, the market hadfallen to 120. The Belgian stock marketpeaked during May of 1929 at 130 and byNovember of 1929 it had fallen to 75. Most

markets had peaked within six to fifteenmonths of the central bank intervention. Insome strange way, the foreign marketsseemed to sense that their currencies wereartificially overvalued.

The first quarter rally of 1930 in the U.S.was noticeably accompanied by sharplylower volume when compared to 1929.January had registered a total volume ofonly 62.3 million shares compared to 110.8million shares for January of 1929. Thedifference narrowed during both Februaryand March to the point that the volume

during March of 1930 reached 227.5 millionshares compared to 294.4 million sharesduring March, 1929. Some of the press dur-ing March of 1930 actually referred to themarket as a "creeping bull market." As vol-ume reached even 5 million shares on a fewdays during March of that year, the value ofseats on the New York Stock Exchange be-gan to rise. After trading at a low of$350,000 during late 1929, a seat traded at$425,000. Although this was a far cry fromthe peak of $625,000 in 1929, it illustratedthat a reaction was taking place in the bro-kerage industry as well.

There were many who were trying to comeup with ideas to stimulate business duringthe first quarter of 1930. One such ideabecame known as the "Bohannon Plan."President James A. Bohannon of Peerless,manufacturer of the Peerless Arrow, sug-gested that auto manufacturers should tryto stimulate auto sales by encouragingthose who were directly or indirectly in-volved in the auto industry to buy a new car.Sales were declining significantly and eventhe dealers were quick to support the idea.


256

Nonetheless, the stimulation would noteven put a pause in the declining demandfor automobiles. By the end of 1930, whenall the sales figures were released, the de-cline was sharp indeed. Ford sales droppedduring 1930 by 50% yet Chevrolet postedsales which were off by only 5%.

During the first quarter of 1930, earningsof many companies began to show declines.The following is a list comparing the firstquarter earnings of 1930 to 1929.

Company 1930* 1929* %Ch

AT&T $40,500 $40,439 .1%

Atlantic Refining 1,124 3,892 71.1%

Beech-Nut Packing 614 654 -6.1%

Chicago Yellow Cab. 532 664 -19.8%

Commonwealth Edison 5,120 4,941 3.6%

General Electric 15,042 14,505 3.7%

General Foods 5,900 5,168 14.1%

Hudson Motors 2,316 4,567 -49.2%

E.I. du Pont 15,854 23,847 -33.5%

Intl Cement 841 1,017 -17.3%

Natl Air Transport 127 120 5.8%

Otis Elevator 1,759 1,692 3.9%

S.S. Kresge 2,759 3,177 -13.1%

Western Union 1,486 3,714 -59.9%

*Expressed in thousands.

The above listing provides some perspec-tive of the mixed earnings at this early stagein the developing depression. The indus-trial producers such as DuPont, the autoindustry and the building industry were allhard hit. In addition, retail chain stores anddepartment stores noted sharply lowerearnings as well. The utilities and tele-phone companies seemed to hold their ownat this point. Western Union, perhaps moreutilized by business than the public, posteda first quarter decline of 59.9% in earnings,which was the most severe of the well-known corporations.

The Dow Jones Index on DepartmentStore Sales curiously enough peaked duringSeptember 1929 at 114. By the end of thefirst quarter in 1930, this index fell to 108.The decline perhaps does not appear to besignificant. However, this index eventually


257

fell to 57 during March of 1933, continuingbeyond the 1932 low in the stock market.

As the first quarter of 1930 came to anend, March 31 closed virtually on the highfor the month at 286.10. March 31, 1930had reached 289.13 and the optimism beganto build with the fundamentalists focusingupon tax cuts, government economic stimu-lation through increased spending, and, ofcourse, the drastic decline in the discountrate on the part of the Federal Reserve. OnMarch 31, Congress passed the PublicBuildings Act, which provided for $230 mil-lion in additional spending in an effort tostimulate the economy. On April 4, an ap-propriation for state road building projectsadded another $300 million in spending tohelp stimulate the economy. The bullish-ness leading into April seemed to be wellfounded. By all Keynesian principles, theeconomy should have supported in the faceof declining interest rates and increasedgovernment spending. Yet, through it all,there was something still lacking in the for-mula for renewed or subsidized prosperity.

As the second quarter began, April con-t inued the uptrend as the industr ialsreached 290.15. Volume continued to in-crease, reaching a new high for the so-called

recovery at 5.3 million shares that day.April 2 was active with 5.3 million shareschanging hands once again. Those were thefirst back-to-back 5 million share days dur-ing an uptrend since the devastation of late1929. But the Dow Jones Industrialsmerely matched the previous daily high of290.15 intraday and closed 2 points lower.

On Thursday, April 3, volume declined to4.6 million shares as did the market. Thatday’s trading range was 288.17 to 282.29 butit at least managed to close higher than theprevious day. Then on Friday, April 4, thebuying began again. Volume that dayreached 5.9 million shares, which would bethe highest volume reached during the re-covery. The industrials managed to make anew high at 291.44 but closed back under290.

Excitement began to build. Closingabove 290 would surely lead to a breakout,the consensus of opinion surmised. Thesentiment seemed to be betting that 300would be broken with ease at almost anymoment and following that, who knew? Af-ter all, the Fed had lowered the discountrate back to 3.5%, which was the very placeat which it had stood just prior to the break-out in early 1928. Was this not a reason in


258

itself for the market to now blast-off to newrecord highs? Earnings may have beenmixed, but value was certainly there.AT&T was only off .1% in earnings yet themarket was still basically 25% lower thanthe 1929 high.

The following day the market tried topress higher but Saturday sessions werenoted for their light volume. That Satur-day, however, volume reached 2.5 millionshares. This was almost double the volumeof previous average Saturday sessions dur-ing this new recovery. Nonetheless, thatday the market couldn’t quite make it. Itstopped dead at 291.06 and closed at 289.96.

On Sunday April 6, optimism for the fol-lowing week remained high. The majoritywas cautious but certainly it expected the300 level to be tested if not exceeded. Ru-mors that the Fed would perhaps cut thediscount rate a bit further made some nerv-ous while it assured others. Brokers’ loanswere certainly far from record levels. Thatwould seem to suggest to some that therewas plenty of room for a continued bullmarket. Still, many failed to see that eventhough volume was improving, the numberof participants was far from overwhelming.

On Monday, April 7, the market openedsteady. Buying began to increase at impres-sive rates. The market pushed ahead again,as most had expected, reaching 293.43.Then on the close, the industrials finishedabove the 290 mark. Volume registered inat 5.49 million shares for the day. The nextday, some nervous profit taking and keenshorts began to hit the market. It slipped atfirst, but nothing drastic. The industrialsfell to 285.96 but closed at 288.36. Volumewas down to 4.6 million shares for the day.

On Wednesday, April 9, the market stageda rally once again. Volume exceeded the 5

million share mark but only by a fraction.The market had charged back up to 293.36,coming close to scoring a new high but nocigar. It did close at 291.15 which was a newhigh closing for the recovery. This sparkedfurther optimism and the majority was cer-tain that 300 would be the very nearesttarget for the week.

Thursday brought renewed buying andthe low of the day quickly formed at 289.72.The suspense continued to build as tradingincreased, posting volume at the 5.6 millionshare mark once again. The day managedto reach 295.98 and closed at 292.19, whichwas another new high for both an intradayand a closing level.

Friday, April 11 dipped back again asprofit taking was seen during the morningsession. But the market staged anotherrally and, sure enough, the industrialsstruck a new high of 296.35. It was an out-side reversal, so to speak. The low of theday was 288.42, which was about a pointunder the previous day’s low. But by theend of the day, the market had also run upand exceeded the previous day’s high andclosed at 292.65, another new closing high.

On Saturday, trading dropped back to 2.1million shares, which was still pretty decentfor a Saturday session. The day remainedwithin the boundaries of the previous dailyrange but on the finish it closed at 293.43,another new closing high. Optimism stillremained high for the following week asEaster approached. Many suspected thatvolume might be light due to the short trad-ing week and the many traders who wereprone to taking a holiday around this time.

Monday and Tuesday remained steadydays with the industrials holding support inthe mid-289 level yet failing to punchthrough the previous week’s high. None-


259

theless, both days continued to hold, closingwithin the 293 level. Then on Wednesday,April 16, the market staged a rally to newhighs after holding the 290 level intraday.This time the industrials managed to reach297.25 but fell back to close at 292.20. Vol-ume was 4.3 million shares for the day.Thursday tried its best to punch throughagain after holding 290 intraday. The high-est it could reach was 296.05, the highestclosing for the year. The entire recoverywas accomplished on this day. The indus-trials closed at 294.07 with volume register-ing at only 3.9 million shares. The highestvolume did not coincide with price.

As the Easter holiday began, much of thenews about first quarter earnings began toappear. Around the world, financial pres-sure continued in Europe and the keen in-vestors began to think twice about thisoptimistic scenario with the Fed and inter-est rates. In India, a civil disobedience cam-paign against the British had begun underthe leadership of Mahatma Gandhi. InFrance, talk of a workmen’s insurance law

was under way and, in fact, by April 30 it waspassed. in the United States, calls for pro-tectionism could be heard in the corridorsof the House of Representatives.

In South America, the depression wascreating problems as unemployment con-tinued to rise and rumors of political unrestbegan to build. The financial press in theUnited States in general was not necessarilybearish. Nonetheless, if one looked closely,the news was certainly not rosy enough tosuggest a raging bull market either.

After Easter, the market tried that Mon-day to stage a rally. However, the best itcould muster was a high of 295.88. But in atrading pattern which many have noticedtoday, markets quite often reverse theirtrend after a holiday. Well, that same coin-cidental pattern seems to have existed thentoo. Easter Monday was met with profittaking and short selling. Volume was 4.4million shares and by the end of the day theindustrials fell to 287.24, closing at 288.23.

DOW JONES INDUSTRIALSMONTHLY: 1930

J F M A M J J A S O N D

300

290

280

270

260

250

240

230

220

210

200

190

180

170

160

150


260

The next day, the industrials paused butonly after falling in the morning to 284.28.The afternoon session saw a quick rallywhich was mostly short covering and littlefresh buying. The industrials jumped backto 291.39, closing at 290.01. Volume was 4.5million shares and many believed that thesell off was over and that the market wouldtry the upside once again.

On Wednesday, April 23, the shorts be-came nervous. The industrials traded backup to 293.27 stopping many out. But thenwhen all the buying was done, the profittaking seemed to come into the market withnumerous odd lots. The industrials turnedsouth and fell right back down, testing286.25 and closing at 288.78 with volumeregistering 5.5 million shares. Volume be-gan to increase on the downside at this time,a distinct shift from the pre-Easter patternwhich had displayed higher volume on updays. Rumors began to circulate frombooth to booth of large bear raiders.

On Thursday, April 24, the market ralliedin the morning reaching 290.58. But once

again the industrials just could not hold thatlevel. By midday the market began to fallsharply as selling increased. Suddenly outof nowhere, the industrials simply fell, en-tering areas where no bids had shown. Theymanaged to gain some support at 283.74and closed at 286.18.

Both Friday and Saturday failed to reach290 on the rally side but each managed topenetrate the previous daily low. By theend of the week, that Saturday sessionposted volume of 2.3 million shares, show-ing a decisive increase for the downside asthat day closed at 285.46, the lowest for theentire week.

By now confusion began to increase. Talkof rising unemployment and demands frommany sectors to raise tariffs began to reachthe ears of Wall Street. Optimism soongave way to pessimism and no one lookedtoward the next week with expectations of300 over again.

The final week in April opened aboutunchanged and tested 286.12 that Monday.

RAILROADSMONTHLY: 1930


160

150

140

130

120

110

100

90


261

Volume was brisk at 4.8 million shares butit was still increasing on the downsiderather than on rallies which perhaps illus-trated the fears which resided in the bullcamp. The selling continued that day, andthis time even 280 didn’t prove to be sup-port as the low of the day formed at 275.71and the market closed near the low at276.94. The industrials had now fallen 22points from the high of April 16, which wasa decline of nearly 7.5%. Tuesday, April 29brought more of the same but the marketheld at 272.24, closing at 278.43, up onlymarginally from the previous daily close.But volume increased to 5.4 million shares.

As the calendar turned the pages of Aprilinto May, the selling persisted. By Friday,May 2, the market fell to 264.93, closing at266.56. Friday’s volume had now posted anew high at 5.9 million shares to exceed thehighest volume record during the pre-Eas-ter rally. That Saturday was not a day thatpeople were prepared to take off. The sell-ing continued again and this time the mar-ket broke severely with the industrialsdropping to 256.99 and closing the week at258.31. But that Saturday in early Mayposted volume at 4.8 million shares withliquidation far outnumbering the bargainhunters. Commentary at the time sug-gested that most of the buying came fromprofit taking on the part of short players.

Poor earnings reports continued and un-employment news still looked gloomy. Talkof a depression seemed to be on the tip ofeveryone’s tongue and the cries for protec-tionism began to rise in pitch and tone. Asthe week of May 5 began, sellers continuedto outnumber buyers. Now, even shortswere not anxious to cover so quickly. Mon-day, May 5 saw the industrials fall to 249.82.But then the market started to stage a rallyand some shorts suddenly changed theirmind once again. The short-cover rally


262

brought the market back to 262.84 intradaybut it closed at 259.68. The balance of theweek was spent moving back up against theshort positions along with some bargainhunting, and by Saturday the week’s highstood at 272.20 with the week closing at272.01.

Nevertheless, news continued to be bear-ish. But despite the fact that shorting themarket seemed the logical thing to do, themarket adopted a stubborn bullish attitudeand simply refused to go down. The indus-trials continued to churn back and forththroughout May and actually reached theirhighest point intraday on May 29 at 276.66,closing the month at 275.07. Debate con-tinued as some called to new lows underthat of the panic of 1929 while the majorityinsisted that it would remain as the majorlow.

June opened at 278.86 after the three-dayholiday, which fell between May 30 andJune 1 that year. However, 276.86 quicklyformed the high for not merely the day, butthe entire month! The industrials closedthat day at 274.45. That first week in Junesaw the market pause from its rally and dropback to 263.29 by Friday. Volume had beenreduced to daily levels which averaged un-der 2 million shares as confusion mounted.Dull was one word which floated among thevocabulary of the traders on the floor.

Then on Saturday came news that a bill inCongress to dramatically raise tariffs wouldperhaps pass, and a few traders becameinterested enough to post volume that dayat 2.2 millions shares. The market fell back,slipping below 260, testing 256.87 and clos-ing at 257.82. Some argued that U.S. indus-tries would rebound as long as Europe wasforced to stop its dumping policies whileothers warned of a growing trade war in thewind. The instability within the market and

the crack within the foundation of confi-dence proved to be the winning hand.

That Sunday there were a lot of reallynervous guys in the market. When tradingbegan on Monday, June 9, it was certainlynot dull. Volume jumped back up to 4.6million shares as the market opened at 259and fell 10 points to 249.51, closing this timeat 250.78. This was a 3.8% move in thecourse of one day. The next day, the DowJones Industrials fell to 247.62 with volumeregistering at 4.7 million shares. But then atthe end of the day, profit taking from theoutstanding short positions drove the mar-ket up 10 points to close at 257.29. But thatwas all she was worth. The next day theindustrials tested 257.24 and said good-byeto the 260 level for what would eventuallyseem like years. The market fell straightdown, punching through to new lows at243.90. The balance of the week continued


263


264

to see selling outpace the buying and theweek closed at 244.25.

As the week of June 16 began, the newsof what would become known as the Smoot-Hawley Tariff Act loomed over the marketlike a black cloud. Monday the 16th gappeddown and the high of the day formed at242.18 while the low of the day was 228.94.The selling continued as news reports indi-cated that the President was going to signthe bill on Tuesday. Hoover as besieged bypetitions from 1,028 economists pleadingwith him not to sign the bill. But history wasmade that week when he signed his name tothat piece of paper. The Dow Jones Indus-trials plummeted to 212.27, closing theweek at 215.30. The selling pressure con-tinued the following week as the industrialsfell to 207.74, off 14.9% from the close ofJune 14.

The Smoot-Hawley Tariff Act was signedon June 17, 1930. This act raised tariffs totheir highest levels during the 1900s, ex-ceeding the Payne-Aldrich Act of 1909. Italso embraced a most favored nations pol-icy, which was first introduced back in 1923.Under this provision, certain nations weregranted large tariff concessions under anarrangement that continued for more than45 years.

Other nations began to raise their tariffsin response to the Smoot-Hawley Tariff Actof 1930. A general world economic depres-sion began to set in during this second quar-ter in 1930 as world trade and productiondeclined and unemployment increased.Even all the public spending programs,which had brought the market to its high inApril, were now old news. With nearly $1billion being pumped into the economy,nothing seemed to matter!


265

H istory has chosen to remember theSmoot-Hawley Tariff Act as one of the pri-mary causes of the Great Depression.However, the United States was tradition-ally a high-tariff nation and contrary to gen-eral belief, the Smoot-Hawley Tariff Act didnot create the highest level of tariffs in his-tory. That distinction belongs to what wasknown as the "Tariff of Abominations" in1828. At that point, tariffs rose to about64% as a percentage of dutiable imports.(Source: U.S. Department of Commerce)

The chart on the average of collectedtariffs on U.S. imports illustrates that thepercent of duties indeed rose to nearly 60%as a result of the Smoot-Hawley Tariff Act.However, an economic decline had clearlybegun some time before this measure wassigned into law. We can see that the chartabove illustrates that tariffs were also at

their lowest point at the end of World WarI. The following table gives us a look at theimport/export picture between 1919 and1940 between the U.S. and Europe, its ma-jor trading partner at the time.

US/EUROPE TRADE BY VALUE

1919-1940 in $millions Economic Statistics

EUROPE

Year Exports to Imports from US/Surplus

1919 5,188 751 4,437

1920 4,466 1,228 3,238

1921 2,364 765 1,599

1922 2,083 991 1,092

1923 2,093 1,157 936

1924 2,445 1,096 1,349

1925 2,604 1,239 1,365

1926 2,310 1,278 1,032

1927 2,314 1,265 1,049

1928 2,375 1,249 1,126

1929 2,341 1,334 1,007

1930 1,838 911 927

1931 1,187 641 546

1932 784 390 394

1933 850 463 387

1934 950 490 460

1935 1,029 599 430

1936 1,043 718 325

1937 1,360 843 517

1938 1,326 567 759

1939 1,290 617 673

1940 1,645 390 1,255

We can see clearly how World War I bene-fited the United States by increasing itstrade surplus with Europe. When we re-view the period for World War II, we willsee how the U.S. trade surplus expandedgreatly at the expense of Europe, onceagain bringing U.S. official gold reserves to76% of total official world holdings by 1950.But it would be misleading to blame theSmoot-Hawley Tariff Act for the Great De-pression. U.S. exports to Europe had de-


266

clined to their lowest point in 1922 as didimports for the 1920s. But the peak in ex-ports actually took place in 1925 while im-ports continued to rise into 1929. The tradesurplus with Europe also peaked during1925 and was declining steadily with theexception of a rise during 1928.

The Smoot-Hawley Tariff Act of 1930 wasenacted during a period when the trend wasalready in a declining mode. Granted, thedecline from the 1928 rally in the tradesurplus was aided more significantly by thenew tariffs and continued to decline sharplyuntil 1933. But the decline was equally assharp for goods produced and marketedwithin the domestic economy. If we look atthe chart on the average U.S. tariffs col-lected on imports, there is no direct corre-lat ion between this and other majordepressions which preceded that of the1930s. Yet most politicians prefer to pointto protectionism as the only lesson weshould have drawn from our experience ofthe 1930s. They fail to attach any signifi-cance to exorbitant tax rates, manipulation

and intervention in foreign exchange rates.Perhaps if Europe had not over valued itscurrencies following World War I and hadaccepted the free market’s evaluation, thenthe intervention of 1927 would not havebeen necessary and a trade war would havebeen prevented. But the insistence of Mon-tagu Norman, Governor of the Bank ofEngland, upon returning the pound to itsformer par value, kept British exports highboth in terms of dollars and in Frenchfrancs. It was France who still festered itstraditional dislike of Britain and, as such,the French purposely kept the franc under-valued in terms of gold to promote exports.As a result, France accumulated a hoard ofgold which surpassed that of Britain whilesimultaneously imposing high restrictionson importation of foreign goods. Francewas by far the most aggressive in leading theprotectionism trend within Europe itself.

The cries for protection from importshave always been made by various sectorsof industry in every nation around theworld. Whether those measures take the

FRENCH FRANC

Fre

nch

Fra

nc p

er U

.S. D

olla

r

MONTHLY: 1930


25.58

25.57

25.56

25.55

25.54

25.53

25.52

25.51

25.5

25.49

25.48

25.47

25.46

25.45

25.44

25.43

25.42

25.41


267

form of quotas or tariffs, the same effectupon trade will result. To think that onlytariffs were the cause of the Great Depres-sion is grossly incorrect. This economiccontraction which took place worldwidewas primarily created by the destruction ofpublic confidence within the economy inaddition to a debt crisis that was hiddenbehind all the press reports and economicstatistics. But the central banks viewed theproblem of a U.S. trade surplus and the U.S.creditor status as a deterrent to the recon-struction of Europe. Non-U.S. bankers ar-gued that unless U.S. interest rates werelowered and trade was shifted back in theirfavor, then repayment of war loans to theU.S. would become impossible.

The true problem was that the U.S. econ-omy had expanded through innovation andthrough the devastation suffered by Europeat the hands of war. But exports clearlypeaked in 1925, NOT during 1929 or 1930.Europe’s capacity to buy was severely ham-pered by its enormous debt service result-ing fr om the war and i t s que st fo rrearmament once again. Furthermore, the

steps to intervene by reducing U.S. interestrates in hopes of attracting more money toEurope should not have been taken. Whatshould have been done was a currency de-valuation in light of the reduced capabilityfor economic growth in Europe.

Instead, Britain chose to try to return thepound to the same level at which it had oncestood prior to the war. This resulted in aserious overvaluation for the pound. Thiskept British imports relatively high when adevaluation would have done far more tostimulate British exports by reducing theircosts to the United States. Britain’s depres-sion was further widened as taxes wereraised in an attempt to hold on to the goldstandard. Once the pressures from this se-rious, major blunder became so great andthe gold standard was abandoned in 1931,the pound collapsed to levels under thoseseen during 1920 following the war.

The U.S.-Europe trade balance expressedon an annual percentage change basis hasbeen provided in the chart above. Here wecan see that the year over year change in the

BONDSMONTHLY: 1930


98

97

96

95

94

93

92


268

U.S. trade surplus was on a steady declinesince its peak in 1920. The decline in im-ports from $1.3 billion to $911 million be-tween 1929 and 1930 was not entirelycaused by the Smoot-Hawley Tariff Act of1930. By the time this Act went into force,half of the year had already expired. As aresult, in comparing the exports between1929 and 1930, a decline of 21.4% occurred.Imports declined by 31.7%. However, thedecline in imports during the first half of1930 was 26%. Obviously, the downtrendwas already in motion and the second halfof 1930 was not such a drastic decline incomparison to the previous year.

When viewed objectively, all the eco-nomic data point to the fact that a generaldecline in world trade was already in mo-tion as of the fourth quarter of 1929. Theprotectionism was enacted as a response tothat decline and to the European monopo-lies which were cutting deeply into manyU.S. industries. Had a decline not been inmotion, there would not have been as muchsupport for higher tariffs as there was at thetime. With this in mind, we cannot blame

the depression upon the Smoot-HawleyTariff Act entirely although the 1920-1930swas a period of unspoken war for interna-tional trade.

We still come back to the fact that dia-monds were off 50% by January 1930; fursand most other raw commodities had de-clined from 15% to 30% by the first of theyear. The decline in the European stockmarkets, which preceded the peak in theU.S. market, illustrated an overvaluation offoreign currencies themselves. The inter-vention implemented in 1927 merely at-tempted to artificially hold those currenciesexcessively high while simultaneously hold-ing the dollar low.

Although many nations sought to returnto the gold standard and set their goal at thepre-World War I levels of par (for example,$4.86 on the pound), this was far too ambi-tious given the actual shift in industrial ca-pability from Europe to the U.S. This iswhat was obvious to Oswald T. Falk. Again,if we refer to the table of imports and ex-ports from the U.S. perspective, we can see

BRITISH POUND

U.S

. Dol

lar

per

Brit

ish

Pou

nd

MONTHLY: 1930


4.88

4.87

4.86

4.85

4.84

4.83


269

clearly that exports peaked in 1925 whileimports from Europe peaked during 1929.

Europe could not afford to purchase allthe production of the U.S. and, therefore,once both the European and the domesticU.S. consumers reached their capacity forpurchasing goods and services, a contrac-tion was logical. Much of the blame trulylies on the central banks and their politicalattempt to strengthen the European cur-rencies at levels which were far too high inrespect to the ability to participate withinthe world economy. The war had devas-tated their economic position, which wasnot reflected in a lower currency valuationupon the foreign exchange markets.

On the surface, one might tend to believethat if the dollar were being held downartificially between 1925 and 1931, U.S. ex-ports should have increased as the overval-ued pound would have purchased moreU.S. goods. That might be the classical re-lationship but the policies in Britain hadforced upon its own people a deflationary

depression, which came to its bottom in1922-1923 and suppressed rapid economicexpansion during the period. If the peoplethemselves were suffer ing from t ightmoney policies, no matter how low the dol-lar goods might be priced, demand was notpresent. Thus, this currency valuation the-ory in relationship to trade is not always oneof direct immediate influence.

Hence, the lower dollar did not encouragean increase in U.S. exports, which is againthe case that is emerging in the aftermathof the September 1985 central bank ma-nipulation. Indeed, this entire period of-fered many lessons that the fundamentalistsseem to have ignored. The increase in gov-ernment spending which was implementedby Hoover led eventually to actual fiscaldeficits, stands in direct contrast to thoseclaims that government has the power toprevent recession by printing more money.

To prove this point, again take note thatU.S. exports to Europe peaked preciselyduring the same period when most nations

DUTCH GUILDER

U.S

. Dol

lar

per

Dut

ch G

uild

er

MONTHLY: 1930


40.32

40.3

40.28

40.26

40.24

40.22

40.2

40.18

40.16

40.14

40.12

40.1

40.08

40.06

40.04

40.02


270

returned to the gold standard at what wasthen called "par" or pre-World War I levels.Thus, the U.S. trade surplus peaked nearthe dollar’s low initially, but failed to im-prove thereafter. And as far as the thinkingbehind the fiscal deficits, we will soon seehow these bullish attitudes for increasedgovernment spending later turned into am-munition for bears.

The intervention of the central banks in1927 was needed to divert capital towardEurope in order to maintain those artifi-cially high levels. That was one of the pri-mary causes of the depression. Thatintervention resulted in the direct and im-mediate effect of a flight in capital frombonds into stocks. As prices were drivenhigher, speculators and novice investorswere drawn into the market for reason ofquick profit. That would not have takenplace had the European currencies notbeen overvalued. The European stockmarkets peaked shortly thereafter as well,and capital from those markets also flowedinto the U.S. stock market. Many smartEuropeans had come to the same conclu-

sions as Falk. Dollar investments were se-riously undervalued.

The observations of Oswald T. Falk, whichwere discussed earlier, were correct. Hisreasons for advising all his clients to sellBritish stocks and buy U.S. stocks werebased on his perception that a true eco-nomic expansion had not taken place inEurope and that the dollar was truly thestrongest currency, although that could notbe seen at the time due to the artificiallyfixed foreign exchange markets.

The stock market crash of 1929 was there-fore not purely a domestic invention but aninternational reaction to interventionwhich had sought to re-establish the formerglory of a world which once existed and hadnow changed. Falk’s forecast that the U.S.economy would grow in the future at theexpense of an older, decaying Europeaneconomy was completely correct and obvi-ous at that point in time.

If we look at May 1930 and compare it toMay of 1929, auto production was down



in m

illio

ns o

f dol

lars

Surplus or Defict by Value

1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

3400

3200

3000

2800

2600

2400

2200

2000

1800

1600

1400

1200

1000

800

600

400

200

0


271

31%, pig iron down 13% and railroad carloadings had declined by 9%. The onlything that had increased was business fail-ures which were up by 9%. This clearlyestablishes that the decline was obviously inplace prior to the Smoot-Hawley Tariff Actand that the Act merely helped to perpetu-ate a trend which had begun prior toHoover’s signing of the bill on June 17. Ifwe look at U.S. exports as a percentage ofG.D.P. (Gross Domestic Product) in termsof constant 1972 dollars, we find that ex-ports made up only 5.28% whereas the Brit-ish exports in 1929 were 22.9% of theirG.D.P. By 1931, these percentages declinedto 4.44% in the U.S. and 16.71% in Britain.If the U.S. depression was caused by a lossof U.S. exports, then the loss of only 4% to5% of G.D.P. should not have created an88% decline in the stock market. Obvi-ously, other factors were involved.

In the chapter for 1927, you will recall aspeech by Dr. Herty. He pleaded with Con-gress to either put up tariffs, to which theyreplied no, or repeal the Sherman Anti-

Trust Laws to allow U.S. industry to bandtogether to fight the cartels which were be-ing organized in Europe. We have alreadyshown how U.S. exports peaked in 1925, yetU.S. imports from Europe peaked in 1929.Had the free market system been so holy,then the U.S. administration should have atleast allowed U.S. industry to compete onthe same level by permitting those mergers.But the government’s view of a monopolyunder the Sherman Anti-Trust Act was fartoo narrow minded. It only considered U.S.domestic monopolies and did not take intoconsideration foreign monopolies. Again,had government listened to Dr. Herty in1927, the protectionism of the Smoot-Hawley Tariff Act of 1930 may have beenavoided. It appears that at the very least,much of the blame for the depression liesupon the mismanagement of governmentand its blunders in legislation and interven-tion. It was clearly not the shoe shine boywho was buying on margin as many politi-cians have tried to make us believe.

SWISS FRANC

U.S

. Dol

lar

per

Sw

iss

Fra

nc

MONTHLY: 1930


0.1945

0.1944

0.1943

0.1942

0.1941

0.194

0.1939

0.1938

0.1937

0.1936

0.1935

0.1934

0.1933

0.1932

0.1931

0.193

0.1929


272

Many economists and politicians, particu-larly Franklin D. Roosevelt, placed a lot ofthe blame for the Great Depression uponthe Smoot-Hawley Tariff Act. Posterity haschosen to distort much of this issue and ineffect seek an easy mark on which to blame

the depression. Others sought to blame thespeculation in the stock market to furtherpolitical power to control the free markets,which to this very day still plague WallStreet. But, if we are to be honest in ourapproach in trying to understand the eventsof this unfortunate era, we must also con-sider all the facts.

The Republican platform of 1928 hadstructured within it a call to reform andraise tariffs, particularly in the hard hit ag-ricultural sector. Those who talk of tradewars and the like should also review theactions of Europe and its tendency to grantmonopolies, such as those to the SwedishMatch Co. on the part of France and Ger-many, in addition to the distinct encourage-ment of cartels and price fixing. These stepswere all taken well in advance of the Smoot-Hawley Tariff Act and were unquestionablymeasures directed toward an easy road forthe reconstruction of the European econ-omy.

The truth of the matter is that the UnitedStates’ efforts to increase tariff levels cameafter similar measures which had alreadybeen underway in 30 various nations. Somenations were striving to rebuild their econo-mies while others were seeking to achievea higher level of self-sufficiency and rear-mament. The postwar era had indeed im-posed upon E urope a var ied e ffectprompted by a still more diverse politicalapproach. In Britain, the full brunt of thedepression had been suffered back in 1922and the balance of the roaring’ 20s had beenlargely a period of stagnation during whichpride had ruled more than reason. Insteadof trying to stimulate economic growth, theBank and the Treasury had sought to graspthe opportunity to force the bitter doctrineof the Cunlife Committee and the lofty as-pirations of Montagu Norman by returningthe British nation to the gold standard,


273

which seriously overvalued the pound at theexpense of its own economic reality. Franceperhaps suffered least among European na-tions essentially because it had undertakenthe opposite direction, which seriously un-dervalued the franc in terms of gold. Thishelped France establish a massive goldhoard which even exceeded that of Britain.But France was particularly adamant aboutprotecting itself from imports. particularlythose in the food sector.

President Hoover’s idea was one which hetermed the "flexible tariff." This conceptsought to remove from Congress the usualhaggling over what products would andwould not be subject to tariffs. The conceptwas actually quite sound given the trade warat the time. A Tariff Commission wouldadjust the measures on a basis whereas thecost of production of a particular productfrom an overseas supplier would be com-pared to that of the domestic producer. Ifthere was an unfair advantage, the TariffCommission would have the authority toraise the tariff of that particular product inan effort to equalize the competitivenessbetween the domestic and the overseas pro-ducer. The actions of the Commission weresubject to the approval of the President.

Senator Borah was originally very suppor-tive of the "flexible tariff" concept to let abipartisan Tariff Commission handle the af-fair rather than have Congress argue overevery nut and bolt or green apple which wason the import list. The House actuallypassed its version of the Tariff Act on May28, 1929 but in the words of HerbertHoover, it was "not satisfactory." SenatorBorah then sprung into action and turnedagainst the bill in his traditional manner ofopposing whatever administration was inpower at the time. Senator Borah suddenlyproclaimed that the "flexible tariff" robbedthe Congress of its authority to preside over

such issues and claimed that it was uncon-stitutional, but the Supreme Court laterruled that it was not.

The President felt that the House bill hadgone too far in raising industrial tariffs byabout 8%; in his mind, the tariffs were moregreatly needed in the agricultural field. OnAugust 20, 1929, the Senate committee hadreduced the industrial levy imposed by the


274

AUSTRALIA

Date

Mill

ions

of P

ound

s

Balance of Trade

Oct-28 Apr-29 Oct-29 Apr-30 Oct-30

6

5

4

3

2

1

0

-1

-2

-3

-4

-5

-6

-7

CANADA

Date

Mill

ions

of D

olla

rs

Balance of Trade


70

60

50

40

30

20

10

0

-10

-20

-30

-40

CHILE

Date

Mill

ions

of P

esos

Balance of Trade


130

120

110

100

90

80

70

60

50

40

30

20

10

0

-10

-20

-30

-40

FINLAND

Date

Mill

ions

of M

arkk

as

Balance of Trade


300

200

100

0

-100

-200

-300

-400

FRANCE

Date

Mill

ions

of F

ranc

sBalance of Trade


100

0

-100

-200

-300

-400

-500

-600

-700

-800

-900

-1000

-1100

-1200

-1300

-1400

-1500

GREAT BRITAIN

Date

Mill

ions

of P

ound

s

Balance of Trade


0

-5

-10

-15

-20

-25

-30

-35

-40

-45


275

GERMANY

Date

Mill

ions

of R

eich

emar

ks

Balance of Trade


300

200

100

0

-100

-200

-300

HOLLAND

Date

Mill

ions

of G

uild

ers

Balance of Trade


0

-10

-20

-30

-40

-50

-60

-70

-80

-90

ITALY

Date

Mill

ions

of L

ire

Balance of Trade


0

-100

-200

-300

-400

-500

-600

-700

-800

JAPAN

Date

Mill

ions

of Y

en

Balance of Trade


60

50

40

30

20

10

0

-10

-20

-30

-40

-50

-60

-70

-80

-90

-100

NORWAY

Date

Mill

ions

of K

rono

rBalance of Trade


0

-10

-20

-30

-40

-50

-60

SWEDEN

Date

Mill

ions

of K

rono

r

Balance of Trade


40

30

20

10

0

-10

-20

-30

-40

-50

-60


276

House but the provisions for the "flexibletariff" had been greatly watered down.

In September 1929, President Hoover ap-pealed to the nation that the "flexible tar-

iff" was essential. The senators, both Re-publican and Democrat, began to attack thePresident’s flexible tariff. Hoover sent amemo to Senator Smoot on September 27,1929, which stated: "No flexible tariff, nobill."

On October 2, 1929, the Senate’s vote onthe flexible tariff was 47 to 42 and it wentdown in smoke. Hoover’s battle to get thetariff decisions out of Congress and into aresponsible committee continued. Most ofthe Democrats were the very politicianswho had raised industrial tariffs consider-ably in their bill striking Hoover’s flexibleprovisions.

On March 24, 1930, the Senate passed atariff bill on a vote of 53 to 31. The flexibletariff provision was again very watereddown. Both Smoot and Hawley fought forthe flexible provisions and in May 1930.

Hoover wrote the provision that he wantedand sent it to the Hill with an ultimatum thatunless his provision for a flexible tariff wasincorporated, his vote would be assured.

The Democrats continued to publicly de-nounce the bill while behind the scenes theydemanded more authority and higher tar-iffs on favored items. On June 7, 1930,Senator Steiwer of Oregon made a publicstatement in which he revealed that Demo-cratic senators who had voted for increasingthe tariff levels behind the scenes were thevery ones who were publicly denouncingthe bill. That helped to quiet the politicalstatements for a while as a few Democratsappeared with egg on their face, as onewould say. Finally on June 12, 1930, theSenate passed the conference report byseven D emocrat ic votes which wereneeded.

The opponents of the bill began a smeartactic and the press took up the issue pri-marily over the levels of increases. Theflexib le bipar t isan provisions, whichHoover had fought for so long and hard,

Great Britain - Balance of Trade


annu

al %

rat

e of

cha

nge


1927 1929 1931 1933 1935 1937

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%


277

gained little attention. Yet in reality, theSmoot-Hawley Tariff Act was one of themost provocative reforms in the tariff proc-ess. Nonetheless, by early July, Europeanresponse to the Smooth-Hawley Tariff Actwas clear. Italy raised its tariffs to absurdlevels, even as high as 167% on autos, whichwas the highest of any nation. In Britain,the bankers advocated that a tariff wall beconstructed around the British Empire.France, who had been the instigator behindprotectionism not merely with the U.S. butamong other European nations, remarkedthat the new U.S. Tariff Act was "blind econ-omy and selfish nationalism." The tariff re-taliation of Europe was far more extremethan any tariffs in pre-1930 history. Ironi-cally, the tariff issue was made up to be farworse than it was by the opponents whoexaggerated the bill prompting overreac-tion on the part of many nations.

On June 15, 1930, President Hoover is-sued a detailed analysis of the Smoot-Hawley Tariff Act. In his memoirs, his de-tailed analysis is provided. The President

stated: "A statistical estimate of the bill bythe Federal Tariff Commission (bipartisan)shows that the average duties collected un-der the 1922 law were about 13.8 percent ofthe value of all imports, both free and duti-able, while if the new law had been appliedit would have increased this percentage toabout 16.0 percent."

The Smoot-Hawley Tariff Act concerneditself with a total of about 3300 items. Ofthis, 890 items were raised in respect to theamount of tariff to be collected, 235 weredecreased, and 2170 remained unchanged.Therefore, the total number of items whichwere increased represented 27% of all du-tiable items.

Over the next two years, Hoover’s TariffCommission reviewed some 250 industrialitems and changed the rate of tariff on 73 ofthose items. The majority of those changeswere steps to lower the tariff rate. None-theless, on a percentage basis, tariffs endedup rising, due in part to serious fluctuationsin foreign exchange. The Tariff Commission

France - Balance of Trade


in b

illio

ns

by value in billions of francs

1900 1910 1920 1930 1940

30

20

10

0

-10

-20

-30


278

was backlogged as Roosevelt suggested inthe 1932 campaign. But this backlog actu-ally began within a matter of days. Theopponents of the bill immediately besiegedthe Tariff Commission by dumping upon itsdoorstep over 50 items to be reviewed be-fore July 1930, in an effort to destroy theCommission before the President couldeven reorganize and set the Commission upto comply with the law. Despite this, it wasa sound concept to establish a bipartisancommittee to take control of the tariff is-sues and take them out of the Congresswhere special interests had a much moreprofound influence. Had the serious pricefluctuations and the devastating foreign ex-change movements in combination with thegeneral instability and lack of confidence inthe system not taken place simultaneously,the concept may have worked under morestable conditions.

In the end, the propaganda largely pro-pelled by Roosevelt during the 1932 elec-tions has left a mark on our perspective ofthe Great Depression and the events whichled to its creation. Undoubtedly the tradewar was one contributor but that trade warhad begun long before the Smoot-HawleyTariff Act was signed by the President. Thatunfortunate distortion lives on in our per-ception of how to manage world trade.Trade must be fair. Regardless of tariffs orquotas both measures seek the same end.But the world must realize that governmentsubsidized industries abroad are a violationof free trade and for any nation to take stepsto counter that unfair trade practice is notprotectionism but self-defense which mustbe addressed. To sidestep such practiceswill in the end create another trade warwhen conditions reach critical levels. Freetrade is precisely that. Protectionism is anact which raises tariffs or quotas to protectan uncompetitive industry. But to enacttariffs or quotas against industries which

are not government subsidized in anothernation so that they can undercut that indus-try in trade is an unethical means to remainwithin a proposed free trade world society.

During June of 1930 rumors began toincrease of massive "bear-raids." Thesewere supposedly groups of big investorswho would sell one particular stock short.These rumors were for the most partproven to be false when the Senate pro-ceedings in later years disclosed the shortinterests. Nonetheless, when a marketmoves in one direction or another the ru-mors must always spread crediting somepowerful individual or group for the action.The truth is always that when broad marketsmove it is the masses that control the trendnot a selected few.

June 1930 also began to show a trendwhich would become one of the most seri-ous by-products of the economic convul-sion. In a single week in early June 15 banksclosed their doors. The event was reportedby the general press but it was certainly notfront page news at this time. Here is howTime magazine reported the failures in theJune 23 edition of 1930:

"Last week there were 15 less banks in thecountry. This shrinkage was caused by:

FAILURES. A period of economic stressand strain is always ominously punctuatedby bank failures. Ten banks last weekclosed their doors. Some were small, theirfailure consequently significant only to theimmediate neighborhood. Of more gen-eral importance were the following:

"CAUSE: Heavy withdrawals. EFFECT:Bank of Bay Biscayne in Miami, oldest bankin Southern Florida and three subsidiariesfailed to open their doors. The four bankshad aggregate deposits of over $19,000,000.


279

To meet possible runs on other Miamibanks the Federal Reserve Bank of Atlantarushed $2 million cash down by airplaneannounced that $6 million more was enroute.

"CAUSE: Allegedly bad Western loans.EFFECT: closing by State Banking depart-ment ‘for inquiry’ of Merrimac River Sav-ings Bank, Manchester N.H. with depositsof $11 million.

"CAUSE: Amos W. Shafer. EFFECT:closing by State Banking Department ofCincinnati’s Cosmopolitan Bank & TrustCo. Mr. Shafer broke the bank single-handed. As district manager of Henry L.Doherty & Co. Cities Service specialists heused the firm’s account to make away with$632,000 which was within $14,000 of thebank’s capitalization."

The story was not altogether that dramaticand it was buried on page 48. But this wasa trend that was becoming more noticeableand served in itself as one reason the mar-ket would fall in the years ahead as bank

failures began to reach the front page. Butit should be noted that the famous "bankingholiday" when both the exchanges andbanks were closed nationwide did not takeplace until Roosevelt took office in 1933.Massive bank failures were not the funda-mental which began this severe decline in1929 or from the recovery in early 1930.Banking failures began to attract news dur-ing the fourth quarter of 1930. However,the majority of those failures were still con-fined to the Midwest as the by-product ofdeclining commodity values and real es-tate-backed loans.

During June 1930 banks were in Washing-ton pleading their case for branch bankingin front of the House Committee on Bank-ing and Currency. Charles E. Mitchell,famed director of the National City Bank inNew York made his case that the small bankwas more efficient as part of a large bank,rather than as a small independent. But theHouse opinion still ran high that mergersmeant a monopoly as Mitchell responded:"Banking is not a business which can bemonopolized." The hearing would con-


Rat

e of

Inte

rest

in %

1927 - 1932

1927 1928 1929 1930 1931 1932

6

5

4

3

2

1

0


280

tinue for years over this issue as is normallythe case in Washington. Eventually numer-ous banks failed because of the weakness ofthe small independent bank. Government’sconcern of monopolies in this area led tohundreds of bank failures in the years thatfollowed.

By the end of June many stocks had fallento reach near or below the lowest levels ofthe panic of November 1929. Du Pont wastrading at nearly 10 points under its Novem-ber low of $109. Mack Truck was trading at$46 against its November low of $55. EvenAT&T was trading at $201.25 which wasclose to the November low of $197.25. OnJune 30 Time magazine commented uponthe market as follows:

"Lowered money rates and reduced bro-kers loans had no effect. It was generallyfelt that bear operators were ready and ableto force continued lows during the presentweek. Basic cause of the market weaknesswas the continued fall in commodity prices.Nearly every basic commodity was selling ata lower price than during any other post-War year and some of the most deflatedwere going back to the beginning of the20th Century."

Commodities continued to fall. At the endof June silver was selling for 33.7 cents, silk$3.25 per pound, sugar 1.27 cents perpound, rubber 11.75 cents per pound andzinc at 4.37 cents per pound. All five ofthese commodities were at new lows for the20th century.

As the second quarter of 1930 came to adreadful close the consensus of opinion re-mained well divided. Economists were in-creasingly pessimistic while many stockmarket analysts claimed that the Novemberlow had held on the broad market ignoringindividual exceptions and that the market

would turn back up. No matter whom youchose to ask the opinions that were offeredwere merely speculations in themselves.

As the third quarter of 1930 made itsgrandiose entrance the market jittery werestill alive and well. Not all entrepreneur-ship had been lost at this point; there werestill some brave souls willing to take achance on the market as well as in business.

Around the beginning of July 1930 apurely American financed enterprise intro-duced a new American car. It was theAustin named after the British gentlemenSir Herbert Austin. The car was shockinglydifferent from those other American mon-strosities. It was only ten feet long or inother words 28 inches shorter than anythingelse produced in the States. The Austin wasproduced in several European nations andover there size was traditionally maintained"small" for several reasons. First and fore-most the European governments taxedautomobiles upon a size and weight basis.Naturally the smaller and lighter the car theless tax you had to pay. Personal incomewas not nearly as high in Europe as com-pared to the States. Therefore Europeancar drivers were also traditionally moreeconomy conscious. The Austin sales werereasonable at first but far from a majorthreat to G.M., unlike the V.W. beetle in the1960s.

One of the seldom known facts of theperiod was that the former President CalvinCoolidge began writing a syndicated dailynewspaper article for the press at this time.He began his first column with this note,finally breaking a long-standing period ofsilence upon the events which were begin-ning to engulf the world:

"We need more faith in ourselves. Largelybecause of some decline in trade we have


281

set about finding fault with nearly every-body and everything. Yet our governmentour physical properties and our industrieshave changed very little from a year or twoago when people were fairly content."

T im e m agazin e co m m e n t e d t h a tCoolidge ’s remarks were "an under-statement" as far as "some decline" in tradewas concerned. Time was absolutely cor-rect. Bank clearings for the first six monthsof 1930 according to Bradstreet (laterknown as Dun & Bradstreet), were off by16.9% in New York City 14.9% for the na-tion and 15.9% in Canada. This meant thatthe velocity rate of money changing handswas declining noticeably. Hoarding of goldcoin began to increase by late 1929 as thegovernment stopped issuing new gold coin-age of any significance.

The gold coin production in the UnitedStates began to come to a screeching haltwhich only served as a catalyst to furtherspur onward the trend of hoarding gold.

The production figures for the $20 goldpiece were as follows from 1916-1928.

$20 U.S. Gold Coins Minted1916 796,000 1923 2,268,250

1917 - 0 - 1924 10,300,500

1918 - 0 - 1925 9,546,750

1919 - 0 - 1926 3,339,250

1920 786,250 1927 6,233,750

1921 528,500 1928 8,816,000

1922 4,033,500 1929-33 Minted, not released

*Coins dated 1929-32 bring 10X to 30X pre-1929

gold coins which were in general circulation.

The above table of $20 Double Eagle goldcoin production seems to correspond tovarious economic events as well. Noticethat 1924 production was nearly a 5-foldincrease above that of 1923. The U.S. tradesurplus jumped up 44% in 1924 above thatof the previous year which was the singlegreatest increase during the 1920 era. Thetrade surplus peaked during 1925 and goldproduction began to decline thereafter.The trade surplus bottomed during 1927and then rose nearly 10% during 1928. But


in m

illio

ns o

f dol

lars

In Millions of Dollars

1927 1929 1931 1933 1935 1937

1100

1000

900

800

700

600

500

400

300

200

100

0

-100


282

from that 1928 peak in the U.S. trade sur-plus, it fell nearly 60% going into 1932 andgold coin production came to an abrupthalt.

Another report was released about thistime which illustrated a very curious aspectwhich had taken place during the secondquarter. The number of U.S. Steel stock-holders had actually increased by 5,557 be-tween the end of the first and the secondquarters of 1930. During the bull market onJune 30, 1929, U.S. Steel had a total of105,612 stockholders. Yet at June 30 1930U.S. Steel had 129,626 stockholders!

After reviewing many of the top compa-nies I found that what had taken place dur-ing the recovery period and into May of1930 was strange indeed. Much of the buy-

ing had taken place with an unusuallyhigher proportion of odd-lots. This meantthat small investors had gone along with theoptimistic attitude which had dominatedthe beginning of 1930. The buying had ac-tually begun to shift with many of the bigplayers fading away after being wiped out inNovember 1929.

On July 14, 1930, Time magazine reportedseveral various opinions which had beenpublished concerning the market. Theywere as follows:

"Hardy indeed is the prophet who will bedefinite in his predictions for the immedi-ate future. Bertle Charles Forbes whostoutly maintains things have gone farenough, last week said July income can beinvested now ‘with every confidence.’ Hepredicted: ‘The turn of the year will markthe turning point.’

"Guaranty Trust Co. of New York in itssurvey wrote: ‘Recent developments do notbrighten the outlook for a marked upturnin the early future...With few exceptionscurrent reports continue to point to further


283

recession in industrial output and trade vol-ume.’

"U.S. Representative Louis T. McFaddenof Pennsylvania, vociferous chairman of theBanking & Currency Committee, made adire prophecy of much lower price levelseven hinted at anarchy and revolution, in-sinuated that vast machinations by J.P. Mor-gan-directed group are to blame foreverything.

"The Department of Agriculture anxiousto reduce wheat acreage came out with alengthy report of which the essence was:‘While improvement is expected over thelow level of prices in the past month, thepresent prospect is that world wheat pricesduring the next seven years will averageappreciably lower than in the past sevenyears.’"

One thing that was certain was this. Earn-ings were declining as illustrated by G.M.,which posted an estimated $100 million inearnings at this time compared to $151 mil-lion for the same six month period during1929. Chrysler cut wages by 10% and inFlint, Michigan, tension continued to buildafter the State Troopers fought off strikingemployees at Fisher Body Division of G.M.Some wages were reportedly cut sharply,bringing the daily earnings of women em-ployees down to $1.20 per day.

The business commitments given toHoover at the end of 1929 were voluntary.Although this was a sound and sensible ap-proach, the contraction in economic activ-ity had a mind of its own. The increasedFederal and local government spendinghad little effect. Consumer confidence wasdeclining as gold hoarding rose. Businesscould not live up to its promise not to curtailspending or cut wages. The reality of a

contracting economy was forcing corpora-tions to cut wages or collapse itself.

Many technicians had recalled the variousother panics which had taken place in 1907and 1920. In both cases the decline wasapproximately 50% from the actual peak inthe market. Here the stock market hadcome close to that 50% correction mark.This led many analysts to believe that theworst was over and that indeed a new basewould be built during 1930. Some pointedout that the worst was over back in 1920within 130 days of the top. The similaritieswhich were drawn between the 1920 col-lapse as well as the collapse in 1907 were infact a logical scenario. But then again peo-ple tried to compare the 1929 collapse tothe mid-1970s and again to the 1982 period.They were wrong in their parallels then asthey were wrong about the parallels in 1930with those of 1907 and 1920.

In Washington hearings on the merger ofStandard Oil Co. of New York and VacuumOil Co. were raging onward in heated de-bate. In defense of the merger, SOCONY(Standard Oil Co. of New York) illustratedthat in 1909 it sold 92% of all oil in NewYork and New England. It illustrated thatits share in 1929 was only 23%. Since thegovernment broke the Standard Oil Co. ofNew Jersey into separate companies underanti-trust powers the government contin-ued to reign over the oil industry with aniron fist.

The government called oil men from allover to the hearing to try to prove their case.The prosecutor was the Assistant U.S. At-torney John Harlan Amen. He put AlbertC. Woodman who was president of Rich-field Oil Corp. of New York on the stand.Amen questioned him asking: "Is your com-pany influenced by the prices established bySOCONY?" Woodman replied: "We are


284


285

not influenced by SOCONY any more thanby half a dozen other companies." Amencontinued: "What company is dominant inthe New York and New England field?Woodman replied again: "No one companyis dominant!"

This trial would become a long one. Gov-ernment was simply not willing to give in.The government called gasoline station at-tendants from New York to New Hamp-sh i r e t o t e st i fy. Th e d e fe n secross-examined and questioned whetherthese attendants knew who was the largestoil company and most didn’t really know.What was clear was that government wasnot about to give away its powers of anti-trust now or ever.

In California a gasoline war was ragingbetween the Standard Oil Co. of Californiaand the independents. The war became soheated that at times some gasoline stationswere literally giving it away for free. OnJuly 12, the Standard Oil Co. of Californiamade a public announcement. "EffectiveSaturday morning July 12, at the opening ofbusiness, the Standard Oil Co. of Californiawill restore its prices for gasoline to levelsprevailing prior to the beginning of the so-called price war. The Standard Oil Co. ofCalifornia announced as a policy that it willnot sell its products to the dealer who cutshis prices."

In the banking industry rumors continuedto spread concerning the repeal of thebranch banking. Many stock players werelooking for suspected mergers and take-overs from which to profit by when therepeal came. Rumors circulated that theMelbank Corp. of Pittsburgh (Mellon fam-ily) was lining up at least 50 banks to ac-quire. The stories told that the secondlargest bank, Peoples-Pittsburgh Trust Co.,had lined up another 25 banks. The stocks

of banking operations were hot at this time,which accounted for helping the stock mar-ket’s pause from the June low. July contin-ued to edge higher and finally closed at233.99 on the Dow Jones Industrials up12.6% from the June low of 207.74.


286

By now the gossip over the resignation ofWaddill Catchings from Goldman Sachsover the Shenandoah and Blue Ridge in-vestment trusts had died down. Previouslyin June, this issue had sparked a lot of fears.The Blue Ridge fund had peaked in 1929 at29 5/8 and fell to 3 1/2. The Shenandoahfund dropped from 39 3/8 to 6 7/8. Thisnaturally hadn’t provided a lot of good willfor the firm at the time and it increasedrumors of massive selling by more invest-ment trusts. What had happened was thatin the heat of speculation, investment trustswere bid up far beyond the asset value ofthe trusts themselves. The same thing tookplace during the mutual fund boom of themid-1960s. As a result the losses of manyinvestment trusts far exceeded those on apercentage basis of their composite stockholdings. This is an important note thatinvestors should keep in mind. A mutualfund whose share value is based solely uponassets rather than speculative demand is thewiser investment for the mutual fund buyer.

At the end of July the press carried theinterest ing comments of Franklin D .Roosevelt who was Governor of the Stateof New York at the time. After an inspec-tion tour of the State insane asylums heproceeded to make a public statement. Itwas picked up by Time magazine as follows:"Unemployment and worry over economiccircumstances are helping to break downmental stability." Apparently, F.D.R. at-tributed the abnormal increase in the num-ber of institutional patients to the break inthe economy.

As early August approached the U.S. ship-yards reported that they were at their busi-est level since 1921. Their employmentroles were moving counter to the economictrend. In July 1930, shipyards employed19,812 men, which was a 21% rise over andabove that of July 1929. The amount of

tonnage under construction was up almost100% over 1929 levels. But the U.S. wasmerely gaining some business on a world-wide basis. They were second to Britain inshipbuilding but that was only a 7.8% share.Britain held 45.5% of that market. Theincreased employment in shipbuilding wasa direct result of Hoover’s policies to in-crease government spending.

Second quarter reports began to emergeat this time. AT&T turned in an impressivereport which showed an earnings gain of$14 million over and above the first half of1929 with a net improved bottom line of$1.5 million. They also reported that theyhad added 165,000 new phones during thefirst half-year of 1930.

General Electric reported that sales wereup $3 million from 1929, but on a $197million sales level it was a very small per-centage gain. But what made it worse wasthat their expenses rose, reducing theirearnings from $1.07 to $1.02 per share.

One of the nice performers was AmericanChain Co, Inc. They reported net profits of$1.2 million for the first half of 1930 com-pared with $1.03 million for the same pe-riod in 1929. Earnings per share jumped upfrom $2.63 in 1929 to $3.30. The chain storebusiness on a retail level was still alive andwell.

The most dramatic rise was that of theGreat Atlantic & Pacific Tea Co. whichmany know as the A&P food store chain.They had 17,000 stores in operation, whichcombined posted sales of $548 million forthe first half of 1930. This was a rise of $41million, an 8.13% increase over and abovethe first half of 1929.

Campbell Soup Co. announced that it hadsold 2.3 billion more cans of its tomato soup


287

during its fiscal year ending June 30, 1930than during 1929.

William Wrigley Jr., Co.(Wrigley Gum)reported that its first half of 1930 postedearnings of $5.6 million, which were up$436,000 over 1929. American Chiclet Co.also reported earnings of $1,081,000 against$1,039,000 for the previous year.

It was clear from these reports coming inthat the consumer had not yet stopped thepursuit of retail items. Perhaps the auto-mobile had reached its saturation point in1929. A viable used car market was devel-oping as well which obviously cut into theirsales following the peak of 1929. But on thewhole, the average consumer was still buy-ing the necessities such as food and clothingalong with the lower priced non-luxurygoods.

August remained essentially a sidewaysaffair. During the first two weeks the mar-ket tended to press lower. News was stillmixed and many felt that the June lowwould hold. During mid-August McGraw-Hill’s "Engineering News Record" publica-tion reported that engineering constructionwas off 17% nationwide. The survey wasconducted on a sectional basis. The NewEngland States showed virtually no declinewhatsoever. But the Midwest particularlyhard hit by the continued decline in com-modities showed a 42% decline in activity.Another building industry statistician andtrade publisher reported in August withtheir survey that in 37 states east of theRockies a decline of 44% from July 1929had taken place in construction.

Time magazine also reported in Augustthat unemployment in the building industrywas currently running 37% compared to16% during 1929. Time commented on thesituation as follows: "Chief reason for the

decline in construction is that money, whilecheaper for many purposes, has not beendiverted back into mortgages as predicted.Interest rates on first mortgages are still5.5% to 6% while seconds must yield atleast 7%. Yields on 15 private buildingbond issues during June averaged 6.2%.Banks and building & loan societies arereported to be loaded up with property ac-quired through foreclosure the construc-tion field is considered ‘overbuilt’ exceptfor special buildings."

Apparently despite the decline in ratesbanks were still maintaining high rates onmortgages. Due to the sharp rise in short-term rates during 1929 banks had gottenburned severely in the real estate long-termloans. As a result they would be reluctantto return to long-term mortgages until thelate 1930s.


288

The Harriman National Bank & Trust Co.issued a bulletin which it distributed to itspatrons. The commentary is interestingand offers a little insight into the feelings ofthe time. They made the following state-ment:

"Merely being burdened with an incompe-tent incapable Senate gives us no reason forlamenting over our condition. Should wegive as much care in attending the comingprimaries and selecting proper, intelligentrepresentatives for Congress as we do inselecting even our golfing and fishing out-fits, that too, may be remedied. Fundamen-tal conditions in America are safe andsound."

Indeed the majority of market analystsbegan to turn bullish during August of 1930.

The June decline had been sharp and se-vere; there was no mistaking that whatso-ever. But it held the previous low! theyargued heatedly. In Collier’s, a well-readpublication at the time, Col. Leonard P.Ayres of the Cleveland Trust Co., wrote hiscomments upon the situation: "Now arisesthe emotion of fear. Things were (lastspring) brighter looking than they were.Now they look darker than they are. This isthe last phase of the depression!"

In August Roger Ward Babson known bymany as the "Prophet of Doom" since hiscorrect call of the top in September 1929,issued his first buy signal. He made severalrecommendations of a variety of most ac-tive to best yields. Barron’s ran a nastyarticle which took a shot at Babson askingif this prophet was able to foresee the de-cline then why didn’t he have the power toprevent it as well. Nonetheless, Babson andAyres were joined by Thomas B. Macaulay,President of Sun Life Insurance Co. Macau-lay’s statement was carried by Time maga-zine which called it the most "bullishutterance yet heard from a responsible fi-nancial rather than a political source." Ma-caulay’s statement was: "I think by the endof this year selected common stocks of thetype we have in our portfolio will on theaverage have regained in market value 60%to 70% of the loss sustained last autumn.By the end of 1931 or at any rate of 1932, Iexpect the average to have perhaps evenattained the 1929 peak again."

As August come to an end the marketrallied and closed at the July high. Theholiday cycle seemed to be at work during1930 as well. The market had fallen sharplyin June and then after the July 4th holidayit had begun a rally. Now as Labor Dayapproached it was nearing the highs for thiscycle. The market closed quite bullish go-ing into Labor Day. But after the holiday


289

the market pushed a touch higher peakingat 247.21 on the 10th of September beforebeginning its decent.

In September 1930, Russia was sellinglarge short positions in wheat on the Chi-cago Board of Trade. The Soviets at thistime were a net exporter of wheat whichfurther helped to depress the price of agri-cultural commodities. The Soviets in needof hard currency were actually rationingfood at home and selling much of theirsupplies in the Western markets. Hooverdisapproved of the Soviet short sales anddemanded that the Board of Trade prohibitshort transactions by foreign governments.The Board of Trade was reluctant to goalong with this proposal and Hoover threat-ened Federal control. The Board com-plied. Russia then turned and dumped itswheat in Europe driving the prices downseveral cents a bushel.

September collapsed with the marketdropping and closing near the low of themonth at 204.90. October managed to rallybriefly, but then the selling pressure was toogreat. Down it fell closing near the low ofthe month once again but this time it wasunder the magic 200 mark finishing at183.35 on the Dow Jones Industrials. Octo-ber had violated the November 1929 low.There was no doubt about it. A bear mar-ket was still in place.

The news which broke the back of themarket was persistent. During the first sixmonths of 1930, 471 banks had failed takingwith them $210 million in assets. It wasreported that 62 were members of the Fed-eral Reserve System. Most of the bank fail-ures were small independents sufferingfrom declining real estate backed loanslargely in commodity oriented sectors ofthe nation.

In addition to the banking news, failureamong brokerage houses seemed to have amore profound impact upon the market.That was the case on the day that the marketpenetrated the 1929 November low. Timemagazine reported the events as follows intheir October 13, 1930 edition:

"All Monday Wall Street was flooded withrumors that a house would fall. Tuesdaymorning stories of pending insolvencieswere thicker, more persistent. At 1:30President Richard Whitney mounted therostrum of the Exchange. Trading was sup-planted by a tense silence. Then an excitedroar greeted the announcement that J.A.Sisto & Co. Inc. were unable to meet theirengagements. Selling pressure increased.By the close of the market 34% of the com-mon stocks listed were at least 20% belowtheir old 1929 bottoms while 59% touchedor dipped under that level. Thus wasgreeted the first notable failure of the year.On the Curb from which the company wasalso suspended support was practicallywithdrawn from stocks identified withSisto."

A severe drought in the United Statesbegan in August 1930. Throughout theMidwest and the South, nearly 1 millionfarm families were affected, in addition tonearly 20 million animals. The initial crisiscreated a severe shortage of feed for theanimals. Hoover arranged for the railroadfreight rates to be cut in half for foodstuffsshipped into the stricken area. The droughtmerely became worse and turned much ofthe Midwest into a dust bowl.

The freight traffic on the railroad systemdropped sharply. In October it was re-ported to have reached a ten-year low. TheChairman of Continental Illinois Bank &Trust came out in October with his prognos-tication of the economy. "The fact is that


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While all the worrying is being done overbusiness the improvement is already underway. I should not be surprised if by themiddle of December we find conditionsconsiderably improved."

The unemployment situation was not fad-ing away. On September 9, 1930, PresidentHoover took steps to curtail immigration inthe United States. All immigration wasstopped with the exception of tourists, stu-dents and professional men and women. Alarge number of people were still attractedto the United States and many remainedunemployed. In 1929, 279,678 immigrantsentered the United States. In 1930, 241,700had entered. Hoover’s measures broughtthis down to 97,139 for 1931 and 35,576 for1932. The Labor Department was also in-structed to rigidly enforce the laws againstillegal aliens and in 1930, 16,631 deporta-tions were made. This measure continued,resulting in 18,142 deportations in 1931,19,426 in 1932 and 19,865 in 1933. Thispolicy was reversed by Roosevelt and de-portations declined to 8,879 in 1934.

At the American Bankers associationmeeting held that October, members re-treated from their position against branchbanking. But they also released their state-ment upon the economic conditions. "Thedepression in this country is merely part ofa world-wide situation due largely to thesharp decline in the price level of raw com-modities. There are evidences that the pre-sent depression has just about run itscourse."

The New York Times published a surveyof corporate dividends. There had been 91companies which failed to pass a dividendto their shareholders. But the generaltrend seemed to refute the whole conceptof a depression. Prior to the peak in 1929,dividends had played a sizable role in forg-

ing the market substantially higher. Yethere we find that the tactics of many com-panies included passing dividends whichwere perhaps unwarranted. Nevertheless,the New York Times composite of divi-dends on an industry by industry basis illus-trated that 1930 dividend levels were by andlarge above those during the raging bullmarket. Clearly, upon reviewing this list,one must give second thought to dividendsas being a reliable factor in a marketplace.The pessimism had actually reached suchheights that it didn’t matter how much acompany was paying or earning. All thatmattered centered around the pessimismthat basically asked how long could theycontinue to pay?

The table published by the New YorkTimes in October was as follows:

DIVIDENDS EXPRESSED IN MILLIONS

First 9 months each period

1930 1929

Banks & Insurance 222.3 108.2

Chain Stores 85.8 49.0

Coppers 144.6 110.0

Department Stores 22.3 16.5

Food & Packing 195.5 106.7

Mail Order 21.5 10.0

Motors 161.1 167.2

Oils 349.1 241.9

Public Utility 730.8 448.8

Railroads 376.2 308.3

Rail Equipment Prod 41.9 40.8

Steels 146.2 100.7

Tobaccos 75.2 61.8

Misc 995.4 603.0

The above table clearly illustrates thateven on an overall basis dividends werehigher. Many industries were not yet feel-ing the pain of the depression as consumerspending did not apparently drop off thatsharply at this point in time for some whileothers passed higher dividends in an effort


291

to support their stock values. The risingdividends did attract some small investorsbuying for cash. This is supported by thefact that the number of shareholders ofblue-chip companies was rising during the1930-1932 period despite the decline inshare value. But this is also a valid reasonwhy foreign investors were also attracted.As the dollar rose in 1931 its appreciationhelped to offset the decline in share valuein terms of dollars while in terms of pounds,stocks still appreciated. The crisis seemedto loom largely among the "educated" U.S.classes of professional investors in respectto the markets.

The decline in the stock market definitelyappeared to be highly influenced by thewithdrawal of foreign capital. This therebydepressed the financial markets which hada lagging effect upon the economy. As thetrade surplus continued to decline, this fur-ther increased unemployment and gradu-ally affected the confidence of the workingclass as well. But the real drain upon theemotion of the nations was certainly thestories of failures and bank closings.

During November the market continuedto press lower as 64 banks in Arkansaseither failed or invoked a State law permit-ting them to close for five days. In thewhole state there were but 437 banks at theend of 1929. In Kentucky 15 out of its 579banks failed. Most of the failures were di-rectly related to commodities as the pricesin that category continued to decline.

The Dow Jones Industrials pressed lowerstill during November. December broughtlittle relief as the market continued its de-cline, dropping to 158 and closing the yearat 163. By the first week in December theNew York Stock Exchange had suspendedits seventh failure of a member. But upuntil now the majority of bank failures had

been in the Midwest. But in December theBankers Trust Co. in Philadelphia failedtaking with it $55 million in assets. At lastthe banking failures were coming closer toWall Street. The Dow Jones Industrialsclosed 1930 at 164.58 down 57.5% from theintraday high of September 1929.

But of all the banking failure stories per-haps the most distorted incident was thetrouble at the Bank of the United States. Ithas been a popular legend that what startedor contributed to the depression was thefailure of this bank whose name many mis-took for the Treasury. There was some hys-teria but no one with half a brain believedthat it was the U.S. Treasury. By December,the first 11 months of 1930 had brought withthem 981 bank failures. Despite the factthat most were in the drought stricken com-modity area tension had built as public con-fidence had continued to deteriorate.

In Bronx N.Y., a small merchant wentdown to the branch of the Bank of theUnited States and asked officials if theywould buy back stock in the bank. Theofficials told the man to keep the stockbecause it was a good investment. The mer-chant somehow misunderstood what thebankers had told him and turned it aroundin his mind that it was a refusal to buy backthe stock on the part of the bank.

By mid-afternoon the merchant had gonearound telling everyone that the bank re-fused to buy back his stock and that obvi-ously something was wrong. With news ofnumerous bank failures in the Midwest itdidn’t take long before the citizens in theBronx believed that the bank of the UnitedStates was about to fail. A sizable run onthe bank broke out that same afternoon andthe police had to be called in to restoreorder. The bad news spread like wildfire toall the other branches of the bank.


292

The run on the bank of the United Stateshad become so widespread spawning abso-lute chaos that that same afternoon anemergency meeting of all the major NewYork bankers took place on the tenth floorof the New York Federal Reserve building.But in reality the run on the bank had actu-ally begun in a quiet fashion several weeksprior. Rumor had it that the Fed was tryingto set up a merger for the Bank of theUnited States with three other banks. Justtwo days prior to the run it had been an-nounced that the third attempt to merge thebank had failed.

The emergency meeting of 100 bankingexecutives brought back memories of thePanic of 1907 when a similar meeting hadbeen held. Everyone from Mr. Lamont. ofJ.P. Morgan to Charles Mitchel of the Na-tional City Bank was in attendance. Themeeting was held in the Governor’s Roomand it continued until 4 a.m. before it com-pletely disbanded. The reporters were try-ing to stay awake hoping to grasp the firstcomment on the situation. Then Joseph A.Broderick, Superintendent of Banks inNew York State came forward and told thereporters that he would have a statement inthe morning. Everyone knew what that an-

nouncement would be. The bank hadfailed!

It was the European press that blow theentire affair way out of proportion. Theill-fated name of the Bank of the UnitedStates was equated in size and statue to theBank of England which of course was"THE" central bank of Britain. But outsidethe Bank of the United States nervous de-positors had been lining up since 7 am wait-ing for the bank to open. Of course thedoors failed to open that day.

The banking industry insisted that thebank of the United States was merely asmall state bank which had too many out-standing loans tied up in real estate. Itsinsolvency was further fostered by the out-standing loans to members of the fur trade.

On the New York Stock Exchange somenervous selling ensued but this was largelyfocused among the banking stocks them-selves. Had that merchant been able to sellhis stock the day he began the run he couldhave fetched about $11.50 a share. By theclose of that same day he would have beenlucky to have obtained $3. At the peak ofspeculation in 1929 shares of the Bank ofthe United States had once traded at $240a share.

Thus ended the year 1930. Confidenceamong the "financially unaware" was begin-ning to crack and crack hard indeed. Thelack of confidence would continue tospread gradually into 1932 bringing with itthe demise of the world economy itself.


293


294


As 1931 began, the effects of the depres-sion were beginning to show more

broadly throughout the world. In the NewYork Telegraph a small classified ad hadappeared in January: Rolls-Royce. Mustsell; will consider Ford trade. Garage, 1210

2nd Ave." The downturn in the economywas unquestionably emotional for many.Time magazine reported in January on thefate of one Robert German, steelworkerresiding in Berlin, Germany. Mr. Germanhad finished his shift for the day afterChristmas and went home. He then put onhis best suit, fully adorned with an elegant,shiny top hat. It was going to be an unusualoccasion at which Mr. German wanted tolook his very best. He returned to the steelmill and chatted with the foreman alongside the cauldron of bubbling 2786 degreemolten iron. Mr. German wanted to lookhis very best so that he might depart fromthe world in style. After a brief conversa-tion, Robert German suddenly dove headfirst into the molten iron. The foreman shutdown the furnace immediately andsearched without success. Not a trace couldbe found of his former friend. The toll onthe emotions of people was not confined tomerely the United States.

In the financial world, many eyes weretrained not so much upon the investmenttrusts, but upon the life insurance institu-tions. This new giant among financiers wasa mere new kid on the block when the bull

market had begun from the depths of de-pression in 1921. The life insurance indus-try had prospered well during several bullmarkets since the turn of the century,thanks to an aggressive advertising cam-paign which in reality twisted a few wordsaround. What one was buying was not insur-ance against the threat of living, but againstthe threat of a premature death. After all, ifone bought insurance against the potentialthreat of fire destroying your house, it wascalled "fire insurance." But the salesman-ship of advertising prevailed. Few peoplewould like to buy insurance that was called"death insurance." It would be rather likehaving an undertaker come knock on yourdoor to show you his latest selection ofcaskets. So instead of calling it "death insur-ance," they switched the words around andcalled it "life insurance."

The advertising campaigns had paid off.By the end of 1930, the life insurance indus-


295

try controlled nearly $19 billion dollars ininvestments which had doubled since 1923alone. This vast sum of money had made theinsurance industry a major player in all as-pects of the financial marketplace. This sumrepresented nearly three times the amountof funds in the call money market. Of theirnearly $19 billion in assets, 40.3% was in-vested in real estate mortgages. Next in linewas a 37.6% investment in stocks and bondsof corporate America and 7% was investedin U.S. and foreign government bonds offederal and local issue. Some shifts withintheir investment portfolios had been noted.Railroad securities had accounted for only17% of the total investments at the begin-ning of 1931 as compared to 35% in 1906just before the Panic of 1907 when the rail-roads led the way down. Public utilities hadrisen to 9.4% in 1930 compared to 8.9% in1929, demonstrating that sentiment at thetime viewed the utilities as a more conser-vative stock investment. The trend withinthe shifting assets of the life insurance in-dustry’s portfolio was indicative of the na-tionwide investment trend.

Any time someone loses money in specu-lation, they always seek to pin the blame onsomeone. Never do they tend to point atthemselves. Such was the case as the stockmarket continued to decline. Money man-agers were chastised when in reality, bonds,stocks, diamonds, furs, commodities andreal estate offered nothing but devastatinglosses. The witch hunts of the Great De-pression were merely in their infancy. Thecries of many to punish someone, anyonefor their losses were indeed numerous. Itbecame common to talk of huge bears whowere in control of the market, squeezing thevery life blood from the market drop bydrop.

One such early victim was a young broker,32 at the time, named John W. Pope. He wasreported to have been a soft-spoken chap,quite independent and a student of values.He firmly believed that stocks alwayssought their values - up or down, he added.John was accused of forcing Fox Filmsdown, and it was alleged that if he had notbeen short the stock would not have plum-meted as far. The New York Stock Ex-

Long BondMONTHLY: 1921 - 1933

1921 1923 1925 1927 1929 1931 1933

100

95

90

85

80

75

70

65


296

change summoned the young fellow beforetheir board of governors. They interrogatedhim in a way that Time magazine called a"harrowing trial by statistics." John W. Popepulled out his charts and his studies of FoxFilms and demonstrated that the stock hadbeen seriously overvalued in comparison tohistorical measurements. The board foundno malicious reports of rumours started byPope, and his documentation as to why FoxFilms had been overvalued won the day. Hewas completely exonerated, but this wouldbe a dangerous trend that eventually led tothe witch hunts of the 1930s.

Another such man who had been hung outto dry was the infamous Charles Ponzi.That’s right, the originator of the "PonziScheme." As 1931 began, the creditors ofhis scheme were at least mailed theirchecks, which represented .5% of theiroriginal investment that had been madeprior to his arrest in 1920. Ponzi was calledthe "duper extraordinaire," and "master andpersonification of the quick buck."

Back in 1920, Ponzi was viewed as theshrewd miracle man of Boston’s HanoverStreet district. Ponzi had promised his cli-ents a 50% profit in 45 days. At times thecrowds that were fighting in line in front ofhis office had to be controlled by police. Onbusy days, it took 14 policemen to keep thecrowds in order. His famous scheme was tobuy postal reply coupons in countries whereforeign currencies had depreciated againstthe dollar. Under postal agreements, onecould buy a reply coupon and send it to afriend, who in turn could take that couponand redeem it for U.S. postage equivalenton a fixed basis to pay for the "reply." Thescheme had its many critics who at leastadmitted that it was possible to profit insuch a way, but they questioned whether ornot one could make as much on the idea asPonzi had claimed. In essence, Ponzi was

taking money from the second customerand handing it to the first, thereby creatingsatisfied customers to go around and hon-estly brag about how much they had made.But sooner or later, cash flow cannot keepup with the payments and hence the schemefolded. In its wake, bank runs had beencreated and several of Boston’s trust com-panies had failed. Ponzi was eligible forparole in 1931.

Back on the more serious side of thetimes, economists remained in heated de-bate as to the causes of the deepening de-pression throughout the wor ld. E venBenito Mussolini had come out blamingthe depression on the U.S. collapse in thestock market. Others argued that the causewas sparked by overproduction, while oth-ers rebuffed this charge and claimed that itwas the other way around. Still othersblamed the overproduction on too muchcompetition. They argued that small com-petitors could not afford to restrict outputand that led to price cutting. Still othersblamed the various pools and cartels. TheCanadian Wheat Pool had been in opera-


297

tion since 1924 and it had attempted tocontrol world prices, but failed. EvenHoover’s Federal Farm Board had at-tempted to peg prices, but ended up buyinghuge surpluses with no way of disposing ofthe grain.

In the oil industry, many blamed the anti-trust laws for putting the fear of God intothe industry as a whole, leaving it wide opento many small producers who waged pricewars to gain their share of the businesswhile the giants were barred from merging.The European Steel Cartel had reneweditself at the end of 1930. U.S. steel produc-ers had at least united to try to battle theEuropeans rather than themselves, but stillno direct mergers were allowed among thebig producers. But anti-trust laws actuallyprohibited price agreements among theU.S. producers, and hence things were doneoff-the-cuff so to speak.

In copper, the formation of the CopperExporters, Inc. in 1926 attempted to fix theprice of copper in Europe. The Americanproducers in this industry appeared to havesome sort of gentlemen’s agreement tryingto ward off price cutting. But again this wasdone at the risk of the anti-trust laws. By1931, copper producers were attempting to

CANADA

Date

Tho

usan

ds o

f Lon

g T

ons

Steel Production


140

130

120

110

100

90

80

70

60

50

FRANCE

Date

Tho

usan

d M

etric

Ton

s

Steal Production


860

850

840

830

820

810

800

790

780

770

760

750

740

GERMANY

Date

Tho

usan

d M

etric

Ton

sSteel Production


1500

1400

1300

1200

1100

1000

900

800

GREAT BRITAIN

Date

Tho

usan

d M

etric

Ton

s

Steel Production


950

900

850

800

750

700

650

600

550

500

450


298

curtail production in an effort to hold theprice. Copper had rallied from 9 cents to 12cents back in November 1930. But as 1931began, copper had drifted back down to 10cents. Threats now loomed on the horizonof new discoveries in Africa, which wouldsoon overshadow any curtailment on thepart of the Western producers.

The tin market was also approaching thecrisis level. The tin producers met in Lon-don during December 1930, but no agree-m e n t co u ld b e r e ach e d t o cu r t a i lproduction. The battle between Bolivia andthe Far East could not be brought undercontrol. The improvement of new machin-ery in the Far East had raised the productivecapability and they were determined to takefull advantage of the situation.

Silver’s perils were endless. Irving Trustin New York blamed Britain for the demiseof the silver market by taking India off asilver standard and moving onto a goldstandard. Thus, substantial selling of silveron the part of India prevailed.

The rubber market wasn’t much better.Back in 1922, the British Empire passed theStevenson Act which restricted the expor-tation of rubber from the British colonies.Despite the fact that this measure helpedcheck an overproduction at the time, theDutch merely continued to increase theirproduction over the years, taking full ad-vantage of the British measures which at-tempted to curtail the decline in rubberprices during the "deflationary" years of1920-1922. During the boom, the Britishrepealed the restrictions in 1928. Due tothe lack of cooperation on the part of theDutch during the 1920s, restrictions werenot restored and overproduction was notchecked during this decline in rubberprices.

Of all the markets in which cartels hadbeen formed, perhaps none was as powerfulas those in the rayon industry. Here, powerresided within a small group which control-led 80% of all production. But worldwidedemand for commodities including rayonproved to be the all-powerful guiding force.The Rayon Cartel met in London duringDecember 1930 and it too ended in bitterconflict with producers failing to reach anagreement to curtail production. Priceswere falling as well as demand, and eco-nomic pressure prevented an agreement tostabilize prices.

The overproduction was virtually univer-sal throughout many industries. This wasthe state of affairs that had greeted thecommodity producers as 1931 followed thedismal scene left in the aftermath of 1930.It was here that many economists chose torest the blame for the depression. But wemust ask ourselves an important question.Was it merely overproduction that forcedprices lower? Obviously a sharp decline indemand had to account for part of theblame. What was it that cracked the confi-dence of capital? Surely there were many


299

parallels with those of depressions that hadbeen severe during the preceding era.

Before a special session of Congress onAugust 8, 1893, and in the midst of thefamous panic of that same year, PresidentCleveland stood tall and delivered the fol-lowing words:

"At times like the present, when the evilsof unsound finance threaten us, the specu-lator may anticipate a harvest gatheredfrom the misfortune of others, the capitalistmay protect himself by hoarding or mayeven find profit in the fluctuations of val-ues; but the wage earner - the first to beinjured by a depreciated currency - is prac-tically defenseless. He relies for work uponthe ventures of confident and contentedcapital. This failing him, his condition iswithout alleviation, for he can neither preyon the misfortunes of others nor hoard hislabor."

Cleveland’s words marked a panic whichperhaps was one where a crisis in govern-ment had taken place. The Treasury, nearlybankrupt, had sparked wild fluctuations inforeign exchange and fleeing capital fromthe United States. Throughout my studiesof economic booms and panics, one under-lying factor had always played the decidingrole. It was the level of confidence. Un-sound financial conditions surrounding thevalue of the dollar had led to a crisis inconfidence. Capital was hoarded by theentrepreneur whenever his confidence inthe economy was shaken. This observationwas also made by Marx back in the 1800s.Marx noticed that during periods when con-fidence was lost, the rich capitalists wereafraid to invest and ended up hoarding theirfunds. He then contended that they merelycreated the depression by causing a con-traction in business investment. Thus thesolution was simple. Take all the capital

CANADANumber of Business Failures


270

260

250

240

230

220

210

200

190

180

170

160

150

140

130

FINLAND

Date

Number of Business Failures


80

70

60

50

40

30

20

10

GERMANY

Date

Number of Business Failures


1200

1100

1000

900

800

700

600

500


300

away from such people and then you did nothave to worry about a lack of confidence. Itwas then logical that depressions could beeliminated.

During the postdepression era, it wouldbe Keynes who provided the guiding lightof hope. He contended that governmentcould prevent depressions by increasing itsspending to take up the slack caused by thiscontraction in business activity led by thedecline in confidence.

Neither idea seems to have corrected thesituation. Marx’s idea essentially tried toeliminate human fears which led to the de-cline in confidence. The ultimate solutionwould be to eliminate man himself and thatwould get rid of greed, speculation, and thecontraction in confidence which always fol-lowed the cycle. Keynes merely injectedanother player who lacked the wisdom tomanipulate the situation, and the fearsabout reelection have proved to be just ascorrupt as the graft with votes as the pay off.Hence, politicians vote for spending meas-

ures to keep their jobs rather than to curtailspending when it was not in the best interestof society as a whole.

This is the nature of events. The humanurge to survive is the dominating forceamong the politicians as well as the capital-ists. Both have condemned the other foractions of self-interest. Yet, if each individ-ual did not act in his self-interest duringtimes of strife then perhaps there would benothing left to survive.

The repetitive cyclical forces which seemto dictate the business cycle are at least inpart created through the cyclical forces ofnature. It is nature which dictates the cyclesin many commodity industries, swingingthem back and forth between feast or fam-ine. In many cases, man’s financial destinyhas been altered or guided by nature includ-ing at times such things as the San Franciscoearthquake. Therefore, nature has playedsome part in the business cycle contributingto the rise of inflation in the food sectorduring droughts as well as deflation from


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302


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oversupplied commodity markets - as wasthe case in point during this period in time.It is only logical, therefore, that governmentcannot foresee such events nor can it pro-vide intervention in such matters. In manyrespects, man has always been at the mercyof nature.

The automobile industry was unquestion-ably the leading star throughout the bullmarket until early 1929 when the price of itscommon stock had begun to falter. From adomestic production level of 5.6 millioncars and trucks in 1929, sales fell rathersharply. In January 1931, it was announcedofficially that 1930 production had fallen to3.5 million units. The industry as a wholewas a very important component within theAmerican economy. It accounted for 82%of the demand in rubber, 55% of plate glass,15% of all iron and steel, 57% of upholsteryleather, 30% of the aluminum, 14% of allcopper, 15% of hardwood and 24% of leadproduction. Time magazine reported thatthe automobile industry also accounted for80% of the total gasoline consumption in

the U.S. and it filled slightly more than 3million freight cars a year in bringing itswares to market. Through direct measures,the industry employed 5 million people butthrough the innovation of this new contrap-tion, originally called the horseless car-riage, it provided countless other jobs in avariety of other industries, and it also gaverise to the future giant, the oil industry.

Thus, the auto industry was still somethingof vital importance to the financial marketwatchers. In January 1931, it had been re-ported that foreign sales of U.S. automo-b i les had decline d by 44% in 1930compared to a domestic drop of 30% in carsales. The 1931 Auto Show, held in NewYork, was an event of some importance.The trend for 1931 demonstrated lowerprices, increased speed and performance,and an increase in the size of engines withfar more eight cylinders along with 12s and16s than ever before. But, to catch the eyeof the consumer, pastel shades of paintwere also introduced. But many viewedthat the tariffs levied against the U.S. auto-


304

mobiles would still pose a deterrent in for-eign sales. Many investors remained pessi-mistic about the outlook for 1931.

The sugar industry was also suffering fromoverproduction. The Russians were hugeproducers and they were dumping sugar onthe markets, driving the prices downward ina clean break. To add more sweetness tothe wound, the U.S. Secretary of Agricul-ture finally ruled that corn sugar could beused in foods without having to declare iton the label. The Corn Products RefiningCo., manufacturers of Mazola Oil, KaroSyrup, Argo Starch, Linit Starch and Kre-mel Pudding Powder, immediately an-n ou nce d th a t i t p lanne d to doub leproduction. This was not welcome to Cuba,Russia, the Dutch, or German Sugar Cartel.After a long battle of trying to reach somesort of an agreement that would curtailsugar production, the Germans finally gavein. A five-year agreement was reachedwhereby production would be cut (in theamount of the preceding annual surplus,but Russia did not participate.)

On the banking scene, the turmoil overthe failure of the Bank of the United Statesin late 1930 had not simply disappeared.Manufacturers Trust Co. in New York wasone of the banks which was going to absorbthe defunct Bank of the United States, butthe deal had fallen through. Manufacturerswas no small bank. On January 2, 1931, itreleased a statement on its current positionat the time. Between September 24, 1930,and January 2, 1931, the psychological ef-fect of the Bank of the United States’ failurehad led to a withdrawal of $109 million indeposits, leaving the bank with $219 mil-lion. A decline of $35.5 million in its capi-tal, surplus and undivided profits had alsooccurred. To rescue the bank, instead ofnegotiating a merger, Harvey Dow Gibson,former President and later Chairman of the

N.Y. Trust Co., purchased 30% of Manufac-turers Trust and assumed the presidency.Rumours told that G ibson’s associates,whom Gibson would not identify, were aleague including either the House of Mor-gan or the Rockefellers. Gibson publiclydenied that rumor and stated that he wouldperhaps reveal his associates at some pointin the future. Manufacturers Trust Co. thussurvived, and in the years ahead a mergereventually came forth forming the famous


305

Manufacturers Hanover Trust Company asit is known today.

Banking failures were now beginning tobecome more widespread throughout theEast, no longer being confined to the com-modity stricken sectors of the nation. In theIndustrial town of Gary, Indiana, the Cen-tral Trust & Savings Bank failed duringJanuary 1931, tying up nearly $1 million indeposits.

In the first section of this study, up to 1929,I provided numerous advertisements forreal estate bonds. Many people have beenled to believe that countless novice inves-tors had been wiped out by the falling stockmarket. The truth of the matter is quite theopposite. Far greater amounts of capitalwere lost by the small investor who pur-chased bonds. Real estate backed bondswere one of the worst investments secondto those of foreign issue. Many of the bank-ing problems that brought down the bank-ing institutions in the East were centeredaround heavy real estate exposure. As thedepression continued to worsen, real estatebecame very nonliquid. Stock at least couldbe sold at a price quoted on the exchangeas long as the company was of importance.But, bond issues backed by real estate sim-ply went into default, taking with themcountless dollars from the savings of thesmall investor. The carnage of the progres-sively widening banking crisis was summedup quite appropriately by Time magazineon January 12, 1931:

"So, in steady sequence, has many a U.S.community suffered the pangs of bank fail-ures, of cash tied up, of prominent citizenssuddenly under suspicion. Fear has fol-lowed faith; tragedy stalked prosperity. Totell of each failure would be impossible. Tofail to search beyond the weekly figures of

failures would be to miss the true socialsignificance of the Depression."

The mood about the market itself was stillquite mixed. On January 19, Time maga-zine reported on the comments of AlbertHenry Wiggins, President of the largestbank in the United States, the Chase Na-tional. The event was the annual stockhold-ers meeting held during mid-January of thatyear. While many other banks had sufferedfrom withdrawals, at least a portion of themoney was flowing into the books of Chase.It was reported that the resources of thisfamous bank had reached $2.6 billion,which was $753 million ahead of its nearestcompetitor. So when Mr. Wiggins hadsomething to say, at least a few people lis-tened.

"The most serious of the adverse factorsaffecting business is the inability of foreigncountries to obtain dollars in amounts suf-ficient both to make interest and amortiza-tion payments on their debts to us and tobuy our exports in adequate volume. Fromthe middle of 1924 to 1929 we delayed theadverse effect of our high tariffs upon oure xpor ts by he avy buying o f fo re ignbonds...Our alternative today is, therefore,either a reduction of our tariffs, or read-justment to our greatly reduced volume ofexports...A reduction in tariff, made in theinterest not of change but of stability, wouldstill leave us our general protective tariffsystem.

"Cancellation or reduction of the interal-lied debts has been increasingly discussedthroughout the world. This question has animportance far beyond the dollar magni-tude of the debts involved...I am firmly con-vinced it would be good business for ourGovernment to initiate a reduction in thesedebts at this time."


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Many bankers were opposed to the hightariffs despite the fact that in many casesthere was a just cause for them and thatmost other nations had imposed tariffs farin excess of those in the United States. Thebankers in general were concerned with therepayment of foreign loans. With the tradewar going on, foreign nations were unableto earn enough dollars to make paymentson their outstanding loans. It is true thatthe situation was always that way. It hadmerely been clouded over by the hugeamounts of foreign bond issues which werefloated subsequently following World WarI. Therefore, the bankers in general nor-mally held the opinion that the governmentshould write off its loans to foreign nationsso that those foreign nations could repaythe loans outstanding at the banks.

Later investigation by the Senate revealeda wealth of corruption, which at this timewas still not publicly known, in respect tothese foreign loans. The profits in floatingthe foreign bond issues were reasonablyhandsome and competition fierce. It wasrevealed by the Senate investigations that

Juan Legula, the son of the President ofPeru, was paid $450,000 in connection withfloating a $50 million bond issue in NewYork . The Chase had extended the dictatorMachado of Cuba a personal line of creditwhich went as high as $200,000 in additionto hiring his son-in-law.

But despite these unethical bribes, theissue that Wiggins spoke of was real. Withthe trade war bringing the volume of inter-national trade down, foreign nations wereunable to earn enough dollars to pay theirloans. But in reality, the extension of addi-tional credits throughout the 1920s was notthe answer to their problems either. In thecase of Britain, it was a clear overvaluationof the pound which was to attain the goal ofMontagu Norman, head of the Bank ofEngland. The pound could not be restoredto the prewar "par" level without creatingmassive deflation as slow economic growth.Thus, the mismanagement of governmentsaround the world was leading contributorto the Great Depression of the 1930s.



Rat

e of

Inte

rest

1915 - 1933

1915 1917 1919 1921 1923 1925 1927 1929 1931 1933

7

6

5

4

3

2

1

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Wiggins’ comments did not stop with theinternational debt crisis. His words were ofinterest on issues of the time. On pricesWiggins commented: "We attempted, as amatter of collective policy, to hold the linesfirm following the crash of 1929...The policyhas had a 13 month test. It has failed...Wemust keep the markets open and the pricesfree."

In reference to wages: "It is not true thathigh wages make prosperity. Instead, pros-perity makes high wages. Many industriesmay reasonably ask labour to accept a mod-erate reduction of wages designed to re-d u ce co st s an d t o in cr e ase b o t hemployment and the buying power of la-bour."

On stocks Wiggins commented: "I do notknow whether we shall see lower prices inthe stock market or not...There are manysecurities, both stocks and bonds, which arenow selling for less than they will be worthin normal times and at prices which shouldprove attractive to the investor."

His conclusion and forecast were: "It is notimpossible to set a date for the beginning ofthe business recovery. I think that we areapproximately at the worst of the Depres-sion and that the next important move willbe upward...I expect conditions at the endof 1931 to be a good deal better than theyare at the end of 1930."

These comments fell up on eager ears.The Dow Jones Industrials had fallen se-verely during the previous year and hadcome to rest below the 160 level duringDecember 1930. But, as 1930 was comingto an end, the Fed had lowered the discountrate for the seventh time since the crash of1929. Thus, January began with the dis-count rate now resting at 2%, the lowest inhistory. But the Fed’s action did not sparkany spectacular rally in the Dow Jones In-dustrials for year end. Most traders re-mained very cautious. The bonds, on theother hand, rallied sharply from under 93 tothe mid-95 level.

Thus Far, January had held above theDece mber low, yet trading was far from


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spectacular. The ranges were narrow inboth stocks and bonds. The bonds rallied,exceeding the December high but tradedwithin a full point range. Curiously enough,the bonds had closed December on the highof the month while the stocks closed muchcloser to the low of the month. Some diver-gence between the two still made its pres-ence felt.

What was interesting was the trend inodd-lot purchases. Throughout most of thelarge blue-chip companies, the number ofstockholders was increasing. Shares ofcommon stock had been passing from theprofessional to the small investor who wasperhaps afraid of the banking situation.This helped to provide some support duringJanuary fo llowing the banking scareprompted by the failure of the Bank of theUnited States.

In January, even Paul Moritz Warburg,who had become somewhat of a respectedsoothsayer for this denunciation of the"speculative orgy" just prior to the collapseand his forecast that it would lead to an

inevitable crash, had a few optimistic wordsto say. Warburg was a well-known bankerand a director of the Manhattan Co. with itsvarious banking units.

"From the banker’s point of view, I do nothesitate to say that within a few years hencethe level at which some of our securities sellt oday wi l l look... incomprehensib lylow...even though one might anticipate ayear or two of reduced dividends."

Indeed, these were impressive wordscoming from a man who many believed hadcalled the events of history before they hadrevealed themselves. But Warburg had afew choice words to add about his view ofgovernment and the business cycle itself.He called the business cycle "a subject forpsychologists" rather than for economists."He also said that government would servea better purpose in squashing booms thantrying in vain to halt depressions. He alsodenounced the high tariffs and any artificialmeasures designed to fix prices.

U.S. Steel Production as % of Capacity

Per

cent

age

of C

apac

ity U

tiliz

atio

n

monthly average basis

1928 1929 1930 1931 1932

110

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Time magazine reported on the commentsof James Augustine Farrell, President ofU.S. Steel. Despite the fact that Farrell hadpronounced that he was bullish on the mar-ket as well as the economy at the end of1929, his obvious error was not uncommonamong business leaders at the time. Butbecause Farrell had entered a period ofsilence in his public comments thereafter,many believed that he fostered a deep, darkopinion of still further declines.

At last during January 1931, Farrell brokehis silence and uttered his opinion upon thecurrent state of affairs. While many busi-ness leaders, economists and analysts werecalling for a recovery to begin in a few shortmonths, Farrell once again stuck his opin-ion where it was not exactly well founded.Instead of projecting a turnaround to beginin the months ahead, he told the world thatit had already begun "30 days ago." There-fore, he contended that the sharp declineduring December 1930 had produced a low.To Farrell that was "THE" low from whichan uptrend was now in motion.

Farrell’s perspective was perhaps coloredby the fact that the steel industry was suc-cessful in actually pushing through a pricehike in December as a result of the protec-t ive tar iffs. In late November 1930,Carnegie Steel had announced that itsprices were "minimums" and a few weekslater the price of finished steel products wasraised $1 a ton. This brought steel bars upfrom $1.60 a pound to $1.65. This com-pared to $1.90 in 1929.

Steel production capacity had fallen to39% from 100% of capacity peak in 1929.Therefore, Farrell’s perspective was onewhich was based largely upon the develop-ments within steel and it did not reflectindustry as a whole. But Farrell’s positionwas notably different from that of Mr. Wig-gins. In response to wage cuts, Farrell re-plied: "Oh no. Wages in the steel industryare not coming down. It is my delicate judg-ment that a general reduction of wages inthis country would set back the impendingrecovery by at least two years."



120

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It was obvious. There were two schools ofthought on virtually every issue of the time.Wiggins maintained that wages should bereduced while Farrell insisted that wagesshould be maintained. Opinions were nu-merous, but solutions few.

Owen D. Young, Chairman of both RCAand General Electric, stated before theAmerican Bankers Association meetingthat in his opinion the Depression had

reached dead center and that improvementwas forthcoming. This opinion was alsoshared by a statement to the press offeredby the U.S. Chamber of Commerce, whichconcluded in a survey of its nationwidemember chapters that "a slight increase inbusiness activity and improvement in theemployment situation" had taken place.Thus, their opinion embraced the conceptthat there was "hope that the ‘dead center’of the Depression is past."

Various leaders within industry echoedthese opinions. Although differences werenoted among what policies should be im-plemented, the consensus was clearly oneof optimism that the bottom had beenreached. This sentiment was also begin-ning to be shared by the investing commu-nity. The Dow Jones Industrials ralliednicely moving into February, exceeding theJanuary high as well as the highs that hadbeen established during both Novemberand December of 1930. The industrials hadrallied coming close to 195 in an effort totest the key low which had been establishedduring the Panic of 1929. The industrialscame close to finishing February above the190 level.

The railroad issues, however, rallied tonearly 112 in February, exceeding the highof December 1930 and that of January 1931.But the November 1930 high could not beexceeded. The rails, which had lagged dur-ing the bull market years, were still trailingbehind the industrials.

The long bonds fell into stagnation duringFebruary 1931. They failed to exceed theJanuary high and traded rather quietly,forming an inside trading affair in compari-son to the range of January. The discountrate stood unchanged since the Decembercut to 2%. The banking failures continued,prompting many to view the industrials as


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the least of all evils and a better alternativeto what was becoming a popular tradition,the mattress.

Trouble was still brewing among bondholders. Defaults were not spreading intothe local municipal issues. After a cost of$13.8 million and little more than a year inoperation, the holding company formed toown the assets of the bridge which con-nected the city of Detroit with Sandwich,Ontario, defaulted on its bond issue. Traffichad fallen substantially and the ferry com-panies began cutting their rates sharplyrather than suffer the alternative, which wasto go out of business. Of the $8 million inoutstanding bonds which were to yield 7%interest, no payments were mailed.

For this reason, and many similar inci-dents, the bonds continued to decline fromthe February 1931 high despite lower rates.One would think that with the discount rateat 2%, bonds yielding 7% would have beentrading far above par. But the reality of thesituation was far from what the normal per-ceptions of relationships would have been.The safety factor of the bond market wasmuch worse than that within the stock mar-ket itself.

February was also the month when mostof the top corporations began to releasetheir final figures for 1930. The vast major-ity of the companies reporting had declinesin earings. G.M. reported $151 million inearnings for 1930 compared to $247 millionin 1929. One exception, Coca-Cola, postednew record highs in earings, reaching $13.5million compared to $12.7 million for 1929.

The following table offers a brief cross-section of various industries with a com-parison of their earnings between 1929 andthose of 1930, which were reported duringFebruary 1930.

CORPORATE EARNINGS COMPARISON

1929-1930

(in thousands)

1929 1930 %change

Atlantic Refining 17,332 2,742 -84.1%

Bethlehem Steel 42,242 23,843 -43.5

Caterpillar Tractor 11,600 8,714 -24.9

Chrysler Corp. 21,902 234 -98.9

Cities Service 36,477 48,974 + 34.2

Coca-Cola Co 12,758 13,515 + 5.9

Colgate-Palmolive 8,910 8,550 -4.0

Cream of Wheat 1,882 1,868 -0.7

E.I. DuPond de Nem 72,300 49,990 -30.8

General Cigar 4,295 3,201 -25.4

General Motors 247,317 151,098 -38.9

General Outdoors

Advertising 1,843 345 -81.2

B.F. Goodrich 7,446 (8,400) -212.8

Hawaiian Pineapple 3,166 2,530 -20.0

Helena Rubinstein 794 554 -30.2

Household Finance 3,372 4,066 + 20.5

Hudson Motor Car 11,594 324 -97.2

Inland steel 11,712 6,498 -44.5

Jewel Tea Co 1,691 1,705 + 0.8

Lehigh Valley Coal 1,190 714 -40.0

Marshall Field 9,218 4,724 -48.7

McGraw-Hill Publish 2,231 2,021 -9.4

National Lead 10,560 4,675 -55.4

Natl Power & Light 13,557 12,630 -6.8

New York Central 77,428 35,981 -53.5

Parke Davis & Co 8,331 7,514 -9.8

Pierce-Arrow 2,566 1,317 -48.6

Public Service NJ 29,544 30,163 + 2.0

Remington Rand 6,068 2,995 -50.6

Reynolds Metals 3,560 1,730 -51.4

S.S.Kresge 14,952 10 ,621 -28.9

Montgomery Ward 13,434 423 -96.8

Sears Roebuck 30,057 14,308 -52.3

Stewart-Warner 6,838 1,262 -81.5

U.S. Steel 197,531 104,465 -47.1

Western Dairy Prod. 1,401 1,124 -19.7

Woolworth 35,664 34,736 -2.6Total 982,763 591,775 -39.7


314

According to a survey by Moody taken ofthe first 744 companies to report on their1930 earnings, the across-the-board indica-tions illustrated a 23.2% average decline incorporate earnings in comparison to 1929.But this figure is a bit misleading. O f thetotal of 744 companies, 375 were industrialcorporations, which posted a decline inearnings of 35.9% for 1930. The railroadsposted a 31.6% decline in earnings. Thebroad average was actually helped by theutilities including the telephone and tele-graph industries. The group which was se-lected for the preceding table produced acombined earnings figure in 1929 of$982,763,000 compared to $591,755,000 in1930, a 39.7% decline.

On the production side, the oversupply incommodities had also filtered over into thetobacco industry. A price war among thecigarette retailers had broken out. Theprice war had initially broken out duringearly 1930 and it appeared as though a trucehad been called in late August of that year.But the truce came to an end in January1931. The two main contenders were theUnited Cigar Stores Co. of America andSchulte Retail Stores Corp. Cigaretteswere normally priced at 15 cents with awholesale cost of 11.26 cents. During 1930,prices had dropped to 12 cents but when thetruce of August arrived, prices moved backup to two packs for 25 cents.

When the battle was renewed in January1931, it was sparked by United which of-fered two packs of cigarettes plus a pack ofGillette razor blades for 50 cents. The offerwas limited to Old Gold, Camels, or Ches-terfields , but the normal retail value was 65cents. As insignificant as this might seem,Schulte reduced prices on those samebrands to 11 cents, but they included LuckyStrikes. This meant that these brands wereselling below cost.

As absurd as it might sound, the AmericanTobacco Company got into the act. Theywere outright mad at United for refusing toinclude their Lucky Strikes in its specialprice war. As a result, American Tobaccorefused to sell its Lucky Strikes to United,in effect declaring an embargo. BothUnited and Schulte were large, nationwidechain stores so the battle was no small mat-ter as evidenced by how it began to draw inthe producers as well.

This example of a price war between twomajor retail chain stores was not unique.Price wars were taking place throughoutmany industries. As economic activity de-clined, including consumer spending, pricewars were seen as a means of defendingone’s market share. Thus, the boom peri-ods produce overcompetition and the sub-sequent contraction forces businesses tofight for their remaining share of sales, re-sulting in free competition but rising busi-ness failures. This was the atmospherewhich began to spread throughout the busi-ness community.

Another unwelcome discovery came forthaffecting the oil industry. With overpro-duction a serious problem for oil men, thelast thing they needed was another newmajor find. But as 1931 began, so did theoil rush in eastern Texas. Land around thearea of Kilgore, which had previously beenselling for $5 an acre, was now bringing$2,000 an acre after a gusher on the Crimfarm spilled oil out at the rate of 22,000 bbl.per day.

The oil industry was not exactly in the bestof conditions. The Richfield Oil Company,which had been a giant in California, filedfor bankruptcy in early February 1931. ThisWestern giant fell victim to gasoline pricewars and proration laws imposed by govern-


315

ment. But stockholders were saved by atakeover offer of one share for every fourof Richfield on the part of Cities Service.The Texas find continued to enlarge andthreaten price stability in a very meaningfulway.

Oil had not been included within theSmoot-Hawley Tariff Act of 1930 and thusimports were fairly significant. Again, gov-ernment laws had been imposed whichplaced the American domestic interests ata decided disadvantage. The policy wascalled "proration" and its design was ameans devised to curtail domestic produc-tion even though the U.S. was still an im-porter of oil. This measure thereby hurtmany of the small independent oil produc-ers throughout the Midwest. The large oilproducers and the small were forced by lawto cut oil production on a "proration" basis.Thus, the larger producers held the mostprofitable wells and a percentage cut inproduction did not necessarily threatentheir viability for the long run. But thesmall producer, by and large, held olderwells which barely skimped along. The pro-ration basis was fair on the surface but noton a cost of production basis.

To further disrupt the industry, the "pro-ration" restrictions did not apply to imports.This created unfairness between domesticand the foreign producer. Adding insult toinjury, the Standard Oil of N.Y. and Vac-uum Oil merger, discussed in the previouschapter, was still tied up in court. The gov-ernment was fighting merger attempts vig-orously, flexing its muscles under the guiseof the Sherman anti-trust powers.

The big four in the industry were Shell,Gulf, Standard Oil of Indiana, and ofcourse, Standard Oil of New Jersey with itsnumerous subsidiaries. All four of thesecompanies maintained oil production out-

side the United States which qualified themas the four largest oil importers within theU.S. economy. The proration restrictionsapplied to crude oil and not to gasoline.Hence, imports of gasoline virtually dou-bled between 1929 and 1930 as a directresult of the proration restrictions. Thismeant that the big four complied on reduc-ing their crude imports and domestic pro-duction, but gasoline was refined offshoreand then imported to skirt around the re-strictions on production. The breakdownwas as follows:

Oil & Gasoline Domestic/Imports(in thousands)

1930 1929

Domestic Demand 922,000 940,000

Imports (Gasoline) 16,927 8,834

Imports (Crude) 62,129 78,933

US Crude Product 896,265 1,007,323

Exports (crude) 23,796 26,059

Exports (Gasoline) 64,978 62,059

*Note: Gasoline expressed in gallons and crude in

terms of barrels.

The above table illustrates the decreasein U .S. domestic production of crude.While imports and exports of crude oil vir-tually balanced, there was a noticeable risein the importation of gasoline. If we trans-late the gasoline back into barrels of oilrequired to yield the 16.9 million gallons ofimported gasoline, then total imports ofcrude oil for 1930 came to 116,652,000 bbl.against 115,200,000 bbl. in 1929 and90,625,000 bbl. in 1928.

Despite the Texas discovery, oil stocksbegan to rally during the early stages ofFebruary for one important reason. The cryof the small independents continued loudand strong. Only after numerous failuresamong this group of oil men took place, didgovernment begin to wake up. The pres-


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sures were naturally divided according tospecial interests. The big four were deadset against any tariff on oil and even the cityof Baltimore, Maryland managed to get inon the act. Russian oil had been importedfor the first time in history and it landed atBaltimore. This gave the city and the statereason to fight against a tariff which wouldcut off the hopes that Baltimore might be-come a booming port for Russian oil im-ports.

The big four argued that tariffs would costthe public an additional $980 million a year.The A.F.L. argued that the employmentsituation within the industry was "deplor-able!" Ralph Arnold, an oil engineer, testi-fied at the Senate hearings that with the newdiscoveries in Texas, the United States hadenough domestic oil to last 500 years underpresent demand circumstances. The Gov-ernor of Kansas sent a rather lengthy tele-gram to President Hoover in reference tothe plight of the small Kansas independentoil producers and the lack of restrictions onimports which he called "appalling." But themost impressive testimony came from theSecretary of the Interior who reversed hisoriginal position which was in favour of theproration scheme. He said: "if proration isthe logical method of control of supply, itwould seem to be logical to apply it to im-ports." The greatest support came for theoil stocks when the Senate CommerceCommittee voted 9 to 6 in favour of theCaper Bill.

Senator Arthur Caper of Kansas intro-duced a bill that called for the total ban onthe importation of gasoline and a limitationon crude, bringing imports down to only 16million bbl. per year over the followingthree year period. Keep in mind that totalcrude importation in 1930 was 116.6 millionbbls. The Caper Bill proposed that importswould be restricted on a proration basis

according to 1928 levels applied to nationsfrom which oil was being imported in thesame fashion as those under domestic rule.The Caper Bill thereby affected the follow-ing imports on a per nation basis:

U.S. OIL IMPORTS

(in thousands bbls.)

1928 1931-33(Caper)

Mexico 17,584 3,527

Venezuela 21,981 4,410

Dutch W. Indies 24,989 5,012

Columbia 11,836 2,374

Peru 1,224 245

Ecuador 765 153

Trinidad & Tobago 496 99

But the issue of the merger of Vacuum andSCONY was not completely dead. Vacuumwas a large producer, but the Standard Oilof New York was an excellent distributor.Therein lay the incentive for the merger.After a year of battling, the issue was takento the Federal Circuit Court of Appeals inSt. Louis. The Court ruled in favour of themerger and against the government. Itsopinion was stated as follows: "There is, andcould be, no contention here that the pre-sent contemplated merger is a continu-ance...of the conspiracy and monopolyfound to exist in the main suit (which dis-solved old Standard Oil). The contention is,and must be, that it is an entirely new un-dertaking... The intent and purpose of themerger is solely to meet the normal andnatural business necessities of the two com-panies." Despite this favorable ruling, thegovernment was expected to appeal to theSupreme Court.

The new oil discoveries in eastern Texassparked an oil rush which was beyond allimagination. In the depths of depression,1929 had not been as generous as 1931 tothis State in the Union. The press began to


319

dub the event as "Oil Madness." The boomwas moving at a rapid pace, dwarfing allgold, land, and oil rush eras which had pre-ceded it.

By the end of February, deposits withinthe two National Banks in the district morethan doubled from $750,000 to $1.9 million.The discovery had spread and now debateraged over how large the find might be. Oilrights in the form of leases passed fromhand to hand at unbelievable figures. Air-planes flew above day in and day out map-ping out the territory for the army ofgeologists that had invaded those parts. Ashundreds of oil wells sprung up and oilseemed to spurt from nearly every hole thedrillers forged into the ground, leases werebeing drawn up on neighboring counties asspeculation over the size of the find height-ened. One such lease on 2,500 acres tradedhands for $3.5 million. This was the find ofthe century which the independents haddreamed of all their lives. At least they weregetting in on the ground floor.

The boom brought with it a burst in eco-nomic growth to virtually every sector. InLongview in Gregg County, the local hoteland the bank kept builders working day andnight hammering out buildings to doubletheir size as people flooded into their oncesmall town. An eight story office buildingat the cost of $400,000 was designed andbrought to the groundbreaking stage in lessthan one month. An ice factory and a dairypasteurization plant were rushed into con-struction. Oil was gushing forth in recordquantities. An on the "spot" market haddeveloped at which oil was trading at 40cents a barrel down from the 70 cent figurewhich had prevailed in Texas. But it didn’tmatter. There were plenty more where thatcame from. Although prices were fallingfor the industry as a whole, the new oil-rich

eastern Texas was basking in the glory ofboom and speculation.

The rest of the nation, however, was notso fortunate. Although some sectors hadshown some improvement, there were oth-ers that could not boast of fantastic earn-ings. The famous Winchester RepeatingArms Co. was one such casualty. Back in1864, a foreman in a small Connecticut fac-tory invented a repeating rifle. A few wereactually supplied to the Union Army duringthe final stages of the Civil War. In 1867,the former Lieutenant Governor of Con-necticut, Oliver F. Winchester, formed thisfirm bearing his own name by merging sev-eral small companies. During World War I,his firm employed 22,500 men in its huge80-acre complex located at New Haven.

Despite the efforts to diversify the com-pany by expanding it into the production oftools, cutlery, fishing tackle, skates, radia-tors, washing machines, batteries and evenflashlights, hard times had taken their toll.The famous Winchester Repeating ArmsCo. was forced into receivership. Its em-ployment roles had shrunk to 3,000 menand most of them were on a four-day workweek. No one blamed mismanagement orillegal activities, but merely stated that thisfamous company was a victim of the De-pression.

Another victim was the securities marketsthemselves. There were 33 organized secu-rity exchanges in the United States at thetime and business was not altogether thatgreat. The Portland (Oregon) Stock &Bond Exchange announced that "until suchtime as the general conditions of the secu-rities markets in the country and the par-t icular situat ion in Portland" justifiedreopening, the exchange would be closed.


320

It was also during February 1931 when theentire brokerage business underwent adrastic change in its mode of business. Priorto this period, brokers were paid a salaryand the commissions went to the house.But now the phrase "Secondary Distribu-tion" was born. Under the old rules, a housecould not buy a stock and then sell it to itsclients. It would buy or sell in the openmarket on account for a client. But this newrule was something different. If a bank hada large block of stock that might be sellingfor $30 a share, the insiders knew that thoseshares were overhanging the market. Thus,this new rule allowed the bankers to give anoption of the shares to a brokerage house,say at $28. The firm would then have itsbrokers try to sell the stock to investors whowould hold the stock. Taking this largeblock off the open market would then sup-port the price and perhaps the stock mighteven rally up to $32 . The brokerage firmwould then sell the stock at the new priceand pocket the difference between its op-tion price of $28 and $32. A portion of thatwould then be paid as a commission to theindividual broker. This was a plan devisedto prevent massive layoffs in the brokerageindustry due to lack of volume that persist-ed.

One industry that was booming was thefinancial statistical information services.The largest statistical organization wasStandard Statistics Co., Inc., which wasmoving into new headquarters in Manhat-tan during February 1931. It occupied eightfloors and employed 1,200 people whichwas a gain of 45% over the previous year.Sales of its information were also up 66%over 1930. Obviously, curiosity about thecauses of the decline and about which com-panies were the best continued despite thedepression.

The founder and President of this vaststatistical company was Luther Lee Blake.He began his career as a telegraph operatorat a brokerage house in Tennessee. He latermoved on to the big time in Manhattanwhere he worked his way up to be themanager of a wire department at Laidlaw &Co., another brokerage house. He used tohandle questions from the firm’s clientswho asked about different companies.Blake began to keep a scrapbook on various


321

companies so that he would be able to an-swer questions and help the clients out.

In 1906, he had the idea of taking 100companies and printing vital informationabout each on a card type system whichcould be updated by simply printing a newcard. He managed to persuade a printer totake a chance on his idea and cover the costof manufacture. At first, Blake used bell-boys to distribute the cards and soon A.M.Kidder & Co., a brokerage house at thetime, became his first subscriber for $60 ayear. Thereafter, J.P. Morgan, Kuhn Loeb& Co., and even the National City Bankjoined his subscription ranks. By 1908,Blake had 300 subscribers.

In 1913, Blake acquired the Babson Stock& Bond Card System, but competition wasalso growing. Some of his competitors wereJohn Moody’s Service which pioneered rat-ing various bond issues. There was also theBrookmire Service, the oldest economicadvisory company at the time. Other com-petitors were Roger Ward Babson, ArthurElliott of the National quotation Bureau

and, the oldest of all services, Poor ManualCo., which later merged with Blake’s Stand-ard Statistics Co. forming what we all knowas Standard & Poor.

February 1931 was a month of mixed eco-nomic data and human emotions. Opinionswere naturally still divided between thebulls and the bears and at times the verysame issue was used in support of an argu-ment from each camp. The Texas oil dis-covery, for example was accused by thebears of driving prices lower as well as prof-its, which might impair the health of thelarge companies. But the bulls argued thatthis new great find would make the U.S. anet exporter by allowing prices to fall belowworld markets in the U.S. They added thatthe proration issue was being applied toimports and that would help establish sta-bility within the domestic markets. Theythen added the court decision in favour ofthe Vacuum-SCONY merger and spoutedoptimism that if the U.S. Supreme Courtwould give its blessing, then the industrycould become even stronger by allowingother weakened companies to merge.

Standard & Poor 500 Stock IndexOriginally Founded in 1906

1906 1916 1926 1936 1946 1956 1966 1976

140

130

120

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0


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There were countless rumours and nu-merous statements by business leaders andpoliticians which gave rise to optimism thatthe depression was at its end. The DowJones Industrials rallied sharply duringFebruary as confidence and optimismseemed to join hands that month. From theJanuary 1931 low of nearly 161, the indus-trials rallied, coming close to 195 in Febru-ary. It was a rally during which manyselected stocks actually doubled in valueduring the four-week period. Time maga-zine reported on March 2, 1931 on the go-ing-ons in the marketplace as follows:

"For three weeks prior to Washington’sbirthday, stocks churned higher on big vol-ume. Bullish rumors flooded Wall Street.There were stories of big bears trapped; ofbig deals brewing. International Telephone& Telegraph gained 100% over its Januarylow and there were tales that it will againattempt to buy Radio Corp’s communica-tion business. Auburn leaped from $101through $210 and bulls said they heard thatG e ne ra l Mo to rs had agree d t o useAuburn’s free-wheeling (clutch) patents.Once again, the names of Mike Meehanand William Crapo Durant were heardwhere speculators gathered.

"Hope and a crowded short-interestrather than facts seemed to sponsor therally. Steel ingot production hoveredaround 51% of capacity against 82% a yearago. But, companies catering to the auto-mobile trade were busier than others.There were rumours of steel price-cutting.Automobile production during Januarycame to 138,876 units against 161,223 inDecember and 283,606 in January 1930.Commodity prices hit a new low averagebut the swift January drop seemed checked.Failures for the week were 722 against 585in the corresponding week of 1930. Bank

clearings for the first week in February were719,053 against 885,816 last year. Moneywas cheaper than last year, with New Yorktime loans to brokers running at 2.10%against 5%, call loans at 1.5% against 4%.

"From the indices there is no indicationthat the improvement in business is morethan seasonal, if that. But, if piblic confi-dence could be charted, a remarkable risewould be shown between December andFebruary. And in that many a commentatorbased a strong conviction that the Depres-sion has reached its depth that the nextchange will surely be for the better."

We can see that Time magazine was one ofthe skeptics. The majority of the press andcomments by virtuous people in businesswere very bullish. For the Dow Jones In-dustrials to have rallied 20% from the pre-vious December low and selected stocks tohave doubled or more, there is no doubtthat optimism must have been high. De-


323


324

spite rumours of bears being caught in therally, later Senate investigations illustratedthat the rumors of large bear raids werewithout substantial evidence. Most of thefamed operators had lost vast amounts ofmoney from playing the long side.

As the February boom returned to thereality of events many began to reflect uponearnings and the drastically poor showingsin most sectors with the exception of thedrug industry and the utilities. Chrysler Mo-tors announced its 1930 earnings during thelast week of February, and then only$234,000 compared to $21,902,000 during1929. Reality had struck optimism directlyin the heart.

There were still a few mergers here andthere and a few selected companies that stillproduced a handsome return although rareindeed. One such company was the Michi-gan Central Railroad. This stock couldhave been bought for $75 a share back in1921 and by 1931 it had paid out $419 individends. There were only 1,283 outstand-ing shares in the market for the balance hadbeen bought by the New York Central Rail-road. Michigan was perhaps the most prof-itable railroad during the big boom eventhough it was a small company. In March,amid falling stock prices, the balance of theshares of Michigan were sold for $1,550each to the New York Central. When thecompany was asked how in the world thatprice was reached, they laid it out quitesimply. Michigan based their calculationson the fact that between 1925 and 1929 thebest railroadstocks traded at about 15.07times earnings. Since Michigan’s earningsaveraged $104 a share, they simply de-manded $1,550 and the New York Centralpaid it.

The battle for world trade continued totake its toll. Canada imposed tariffs so stiff

against U.S. steel that U.S. owners wereforced to sell off assets in Canada. Repub-lic Steel Corp. produced steel in Ohio.Much of its unfinished steel was thenshipped to its wholely owned subsidiary inOntario which was named the CanadianMetal Products Co., Ltd. Canada imposedtariffs that in effect created an outright em-bargo on the importation of steel. Republichad no other choice and it was forced to sellits Canadian manufacturing company for asong to Burlington Steel Co., Ltd. of Ham-ilton, Ontario. This move led to the down-fall of Republic in the years ahead.

Despite the fact that interest rates weredeclining, banks were not big lenders to thesmall individual. The personal loan was nota practice that gained favour in the bankingindustry. Anything along those lines re-quired the cosignature of a friend and asmuch collateral as possible, if not 150%.This gave rise to the small loan business ofpawnbrokers and "usurers" as they werecalled.

The small individual seeking to borrowmoney was forced to pay 42% a year! De-clining discount rates didn’t help this seg-ment of society at all. A common practicewas that a wage earner’s pay check wasnormally postdated. This gave rise to theoften termed "salary-purchasers." Thesechaps offered $50 for a $55 paycheck, takingadvantage of the person who needed thecash immediately. Pawnbrokers were re-ported to be lending money at the highestpossible legal rate and then forcing the cli-ent to pay $10 for $1 worth of merchandiseto get around the laws. The "userers" wouldcollect $10 a month interest on a $50 loanfor years at a time. Studies were conductedand it was learned that families of smallmeans that were forced into bankruptcywere normally bled to death by these sortsof things for years.


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The Morris Plan Banks were charging 6%interest plus a 2% service charge. This wastaken out of the proceeds of the loan at thestart and then the borrower was forced tomake monthly payments along the way. Bythe time his first year was up, he was actuallypaying 17.3% in interest. Other private per-sonal finance companies were charging3.5% per month, bringing the total amountof interest paid by the borrower to 42% peryear.


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The interest rates varied considerably be-tween the different companies that wouldlend money. The breakdown was as fol-lows:

ANNUAL RATE OF INTEREST CHARGED

Range of Interest (%)

Low High

Life Insurance Co. 6% 6%

Building & Loan Soc 6% 12%

Credit Union 6% 18%

Commercial Banks

(personal loan dept) 9% 22%

Installment Finance Co. 16% 25%

Industrial Banks 17% 34%

Remedial Loan Soc 12% 36%

Personal Finance Co. 30% 42%

Pawnbrokers 12% 120%

Salary Buyers 120% 480%

From the peak in optimism in February tothe cold hard reality which struck in March,the Dow Jones Industrials fell closingMarch virtually on the low near the 171level. The industrials had fallen almost 25points which came very close to a 15% dropin less than five weeks. The initial tenden-cies to run back into bonds had shown lifein this once popular relationship. The longbonds rallied, not by much granted, but theyforged a new high for the year duringMarch. But by the end of the month confi-dence in the bond market was not that con-vincing. The bonds fell closing under 96near the low for the month following thestocks.

During the February rally there had beennumerous rumours of bear pools that hadbeen caught short. But despite the persist-ent rumours none ever surfaced. But in thesharp decline that took place during March,the demise of a bull pool did surface. Thisone was operating in Chrysler which had

turned in a horrible earnings drop as wasmentioned earlier.

A pool had been formed by the two bro-kerage houses of J.S. Bache & Co. and E.F.Hutton & Co. The terms of the pool werethat it would exclusively trade in commonshares of Chrysler but never hold more than500,000 shares overnight. Others partici-pated in the pool as well. Both Mr. Bacheand Mr. Hutton sat on the board of Chrys-ler. The other big player was William F.Kenny who was a rich Brooklyn contractor,a one time director of Chrysler up until1928 and best friend of Alfred E. Smith. Itwas revealed finally in March 1931 that thepool had been closed out on July 16, 1930when Chrysler was $29. Both Bache andHutton filed a suit in court claiming thateveryone had paid in their share of thelosses except William F. Kenny. The newsthat this once famous bull pool had metwith disaster did not help the atmosphereduring late March.

Retail sa1es at Sears were not that great.It was in March 1931 that Sears began whatwould become one of the larger insurancecompanies in the United States - All StateInsurance Co. The new insurance companyplanned to write automobile, health, bur-glary, theft and accident insurance. All-state got its feet wet by providing autoinsurance to all the employees of SearsRoebuck & Co.

It was also in March of 1931 that therenowned firm for Kidder Peabody & Co.was dissolved and reborn. The firm wasoriginally formed way back in 1865. By theturn of the century, Kidder Peabody hadbecome one of the leading private banks inBoston. In August 1929, William Endicott,a key director who had entered the firmback in 1887 resigned. This was followed bythe death of 89-year-old Frank G. Webster,


327

a senior partner, in January 1930. Web-ster’s death was sudden and unexpectedand despite his age he had remained anactive guiding light for the company. Thenfive days later, the key man who ran theday-to-day operations, Robert Winsor diedsuddenly as well.

Rumours continued to circulate that thefirm was in trouble. It was Kidder Peabodythat also held a sizable portion of the stockin Winchester. Finally it was official. Theannouncement came as a relief that the oldpartnership was dissolved and a new onewould take its place but the firm wouldretain the same name and the tradition ofHarvard schooled management.

At the meeting of the National ForeignTrade Council held in March 1931, its chair-man addressed the Council with thesewords: "There are indications that theworldwide depression in business...is sub-siding and that the upturn is beginning."The chairman was the same chap whoheaded U.S. Steel Corp., Augustine Far-rell. His opinion had not changed from ear-lier in the year but he did add that theCouncil had taken a survey and estimatedthat world trade as measured through ex-ports, dropped from $33.5 billion in 1929 to$27 billion during 1930. On a volume basis,not in terms of dollars, he stated that worldtrade was therefore off by 10%. Yet interms of dollars, world trade was downnearly 20%. One could argue this pointsince the dollar was strengthening againstmany currencies around the world. Thus itwould take less dollars to pay for the sameamount of world goods.

Just the week before, Farrell, as Presidentof U.S. Steel publicly pointed out that hiscompany had just received the largest orderfor "structural steel ever placed!" The ordercame from Manhattan for the construction

of what would become a famous New Yorklandmark - the Radio City building.

Meanwhile, another merger caught theattention of many in the market duringMarch of ’31. It was the merger of RCAand Columbia. This merger had been arumour that festered on and off for over sixmonths and, in fact, it had appeared againprior to the peak in 1929. At last a rumourthat had come and gone many times,prompting buyers in both companys’ stocks,had come to pass.

There was also another court battle whichhad been going on for some time. This onewas a test case that seriously affected theaccounting industry itself. A companynamed Ultramares Corp. of London hadlent Fred Stern & Co., Inc. of New York afairly sizable amount of money based uponan independent audit prepared by the firmof Touche, Niven & Co. Fred Stern & Co.went into bankruptcy soon after the loan.Ultramares brought a suit against Touchecharging negligence in preparing the audit.The first round produced a verdict that Tou-che was liable for an employee’s negli-gence. But later a Court of Appeals inManhattan overturned the lower court’sdecision. The court ruled that a financialstatement which specifically figures as"true" would be guilty of negligence. Butsince the statement had concluded "in ouropinion" no testament was intended.Hence accountants were relieved andadopted the phrases "we believe" and "inour opinion."

As lawsuits mounted and people foughtover losses - sometimes in the courts andsometimes in the streets - the once brightnotes of optimism could no longer be heardas April began to go to work on the market.The Dow Jones Industrials fell severely,penetrating not only the January 1931 low


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but the supposed low of the Depressionwhich had been established back duringDecember of 1930. The industrials hadclosed March at 172.36. April 1st had ral-lied to 173.72 on an intraday basis but fellback closing at 170.82. Thursday, April2nd, remained nervous rallying back up to173.15 but closing at 169.89.

The 3rd of April was Good Friday and themarket closed for this solemn occasion. ButSaturday it was business as usual and themarket rallied once again back to 173.36,closing at 172.43. The market was closedfor Easter Sunday and when Monday came,the holiday cycle seemed to make its pres-ence felt. Easter Monday rallied to a newhigh for the month touching 174.69, but thegains could not be sustained. Selling camein once again and the market fell closing at169.72. The selling pressure continuedthroughout the course of the week bringingthe industrials down as far as 166.10 andclosing the week at 168.03.

The following week began with Mondaythe 13th posting a rally as the market closedat 171.07. Tuesday tried to rally to newhighs but the best she could offer was anintraday high of 173.24 and a weak closingat 168.43. The selling continued and byFriday the industrials had fallen to 158.50closing that Saturday at 162.37.

The week of April 20th continued withsellers out-muscling the buyers. The mar-ket fell to a new low almost every day, drop-ping to 151.58 and closing at 151.98 onSaturday the 25th. The December 1930 lowhad been 158.41. The final week of the 27thbegan with continued selling pressure. Thehigh of the week was 153.82 and the low was141.78. This April low had held until May18th, but in the meantime the industrialshad at least rallied during May back to156.17 at its very best.

On the world foreign exchange markets,pressure was building. The U.S. dollar be-gan to strengthen. In April as the stockmarket dropped, the dollar began to riseagainst the French franc reaching its highfor the year during this month at 25.641francs per dollar. Against the Dutch guil-der, the dollar had fallen to a low of 40.08guilders to the dollar in March. But Aprilbrought a strong rally for the dollar againstthis currency as well jumping to 40.195.The dollar continued its rally against theguilder into October, finally reaching 40.35.Against the pound the dollar actually de-clined slightly from its March high of $4.85as the pound rose in value to $4.86 in Aprilwhere it remained until June. But therewas no doubt something was brewing in theforeign exchange markets causing a slightlyhigher rate of volatility. The astute inves-tors knew something was going to give. Thequestion was what?


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The causes for the sudden break weremany. The effects of the depression werebecoming severe in Canada which was aprominent trading partner. Canada hadimposed stiff tariffs against steel as dis-cussed earlier, but it also instituted tariffsagainst a number of finished products in-cluding automobiles. In effect an embargoagainst U.S. autos had been put in place.U .S. sales of automobiles to Canadadropped virtually overnight during the firstquarter of 1931 bringing them down to nil.Nash Motors and Durant Motors of Canadajoined forces and formed a subsidiary toproduce autos at Leaside, Ontario inMarch. Both the Reo Motor Car Co. andHupp Motor Car Corp. made arrangementsto open plants directly in Canada. The autoindustry was already off 40% in earnings onthe average between 1930 and 1929. Thefight to remain competitive only furtherweakened the industry and rumours thatthe first quarter of ’31 was going to be dis-astrous spread through the stock market.

The production total for automobiles inApril 1931 was nearly 350,000 units com-pared to 444,000 in April 1930. Chevroletwas still gaining over Ford. Its April pro-duction came to 85,000 units compared toMarch. Cadillac was also up 26% aboveMarch 1930 levels and on a quarterly basisit was up 20% over the first quarter of 1930.But these gains were at the expense of othercompetitors including both Chrysler andFord.

In its April 13, 1931 edition, Time Maga-zine commented on the atmosphere asearly April began:

"A heavy gale accompanied April to Man-hattan. Wall Street ran with water-down.Offices were lighted all day. It was dismal,not exciting, on the floor of the New YorkStock Exchange. Most traders kept an eyeon Post 2, where United States Steel istraded in. Shortly after noon Steel sold at$138, one-eighth above its previous 1931low. It was evident that what had a fewweeks before seemed a run-away Springmarket had petered out.

FRENCH FRANC

U.S

. $ P

ER

FR

EN

CH

FR

AN

C

MONTHLY: 1931


25.66

25.64

25.62

25.6

25.58

25.56

25.54

25.52

25.5

25.48

25.46

25.44

25.42

25.4

25.38


330

DUTCH GUILDERU

.S. $

PE

R D

UT

CH

GU

ILD

ER

MONTHLY: 1931


40.36

40.34

40.32

40.3

40.28

40.26

40.24

40.22

40.2

40.18

40.16

40.14

40.12

40.1

40.08

40.06

BRITISH POUND

U.S

. $ P

ER

BR

ITIS

H P

OU

ND

MONTHLY: 1931


4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3


331

"Traditionally April 1 is the day whenbankers and businessmen can look aboutthem, size up the state of business. All lastweek figures were being issued whichshowed that the Spring recovery in businessdid not exceed the usual seasonal gain andwas giving signs of dying away. Perhapsmost frightening, so far as the stock marketis concerned, have been the many dividendreductions and omissions, although thesereflect past business not future. DuringMarch, 114 dividends were omitted, asagainst 57 such actions in March 1930; 115dividends were reduced against ten lastyears.

"Insolvencies during March came to$60,386,000, a 6% gain over March of lastyear and the largest for the month since1924. Insolvencies during the first quarterwere $214,000,000 against $218,000,000 in1922, $169,000,000 last year.

The market had taken the continuallyrising dividends and earnings as the keynoteto a bull market throughout the 1920s. You

will recall that the critics of the bull marketdid not deny that the earnings were spec-tacular, they merely kept saying from 1923onward that such gains couldn’t possiblylast.

In the commentary taken from Timemagazine above, we find that it was theomission of dividends and the poor earn-ings reports as well as expectations of thefuture which contributed in part to the de-cline from the February high in 1931. But inaddition, there were numerous other indi-cators that the traders were watching verycarefully. Bank clearings were off 22% sug-gesting that money was not only beinghoarded, but sat upon by many out of fearof safety but also out of a natural urge to putsomething away for a rainy day. At thattime the rain had turned into a typhoon.

Railroad car loadings were also off 15%from 1930 levels in March of ’31 and down22% from 1929 levels. Of the first 75 rail-roads to issue February reports, there was a53% decline in operating income.


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The optimism which had once existedeven in the oil industry gave way to the logicof the pessimist. Government’s harass-ment of this industry had continued in theearly 1900s in breaking up the old StandardOil Co. under the guise of the ShermanAnti-Trust Act. Ever since that time, gov-ernment’s oppression continued to plaguethe oil industry. In January 1930 in theFederal Court of Chicago, the governmentcharged the Standard Oils of New Jerseyand Indiana along with Texas Co. and 45other oil companies with violating the Anti-Trust Act in keeping tight control over theirpatents and for a variety of cross-leasing offields between companies. The govern-ment won that case back in 1930, but inApril 1931 the U.S. Supreme Court heldthat the companies did not create a monop-oly which hindered interstate commerce bymaintaining patent rights. The battle hadraged on for seven years costing the share-holders millions in the process. Despitethis bit of good news, the new discoveries inEastern Texas were officially estimated tohave a capacity for the production of500,000 bbls. per day. This worked out tobe 182.5 million bbls. per year, which was a20% increase above current domestic pro-duction. This obviously didn’t help the oilstocks very much at this time.

In addition, the periodical, World Petro-leum, reported on the rumours that Sovietoil production would capture the Chinesemarket which was primarily for kerosene.This naturally was viewed as a setback forU.S. interests which supplied that market.U.S. refineries in April 1, 1931 were oper-ating at 65.3% of capacity compared to70.9% on April 1, 1930. Prices of oil con-tinued to decline and inventories of gaso-line continued to rise as illustrated by thefollowing tables:

U.S. CRUDE OIL PRICE MOVEMENTS

Jan 1 - Apr 1, 1931

Jan 1 Apr 1 %chng

High-Grade Calif 1.48 .35- 76.3

Mid-Continent .81 .53 34.5

U.S. GASOLINE INVENTORY IN BBL.

Jan 1 - Apr 1, 1931

Gasoline Stocks 42,218 47,444 + 12.3%

The above tables clearly illustrate theplight of the oil industry during this phaseof the Great Depression. By mid-April ’31,Shell Oil cut its work schedule to a five-daywork week. This merely added to the un-employment rolls. The trend was clearlydeveloping into cutting both time andwages as opposed to the original sugges-tions made by Hoover to cut time but notwages to relieve the state of overproductionand maintain consumer purchasing power.

The government’s intrusion under theguise of the Sherman Anti-Trust Act contin-ued to broaden. The government even be-gan a monopoly investigation of RinglingBrothers, Barnum & Bailey Circus. De-spite the adverse effect upon U.S. competi-tiveness in world markets and the risingdifficulties which faced U.S. industry, thegovernment vehemently pursued the Sher-man Anti-Trust laws under the promise ofprotecting the consumer. In many ways, itwas the Anti-Trust Act that spawned theneed for the Smoot-Hawley Tariff Act of1930 which in turn merely stimulated theworldwide trade war.

The decline in the market at this time wasalso caused in part by additional bankingfailures. But perhaps within this sector ofcauses, none was as highly influential at themoment as the failure of the well-knownbrokerage house of Pynchon & Co. Thefailure of this firm was indeed a surprise.More than a year before there had beenrumours that this renowned firm was in


333

trouble. Nevertheless, it was also wellknown that the famous Chase NationalBank stood behind it to some degree. Backin 1930 it was rumoured that Chase hadloaned Pynchon anywhere between $10 and$20 million. Many were comple te lyshocked by the flash across the ticker whichread: PYNCHON & CO SUSPENDEDFOR INSOLVENCY."

Despite the rumours, the majority justdidn’t believe that this firm would actuallygo down. The Exchange itself was in pos-session of a telegram in which a well-knownChicago tycoon was reported to be puttingup needed capital. So most had thoughtthat it was a temporary situation and thatany problems had been forestalled. But theChicago tycoon’s capital never came topass.

Pynchon & Co. was no small house. It had11 offices including offices in London, Liv-erpool and Paris in addition to being amember of 16 stock and commodity ex-changes. Pynchon & Co. had been aroundfor 36 years, certainly qualifying it as one ofthe "establishment." Yet the amount ofmoney involved came to $40 million, whichqualified it as the largest failure in the his-tory of the New York Stock Exchange upuntil this time. Indeed the effect that thisalso had upon the market was not one of thegreat expectations. Three days later, thefirm of West & Co. based in Philadelphiaalso failed. West & Co. was not consideredto be a major firm, but it helped to raisefears over the stability of the brokeragebusiness in light of the numerous failurestaking place within the banking industry.

Another factor that added to the heat ofselling was the continual reporting on thefirst quarter earnings. Many investors,speculators and traders had just allowedtheir hopes to override reason, creating an

atmosphere of jubilant expectation as themarket rallied into the February high. Butnow those expectations proved to be veryambitious and all the comforting wordsfrom business leaders did little to improvethe situation. The following table illus-trates a few selected industries.

1931 FIRST QUARTER EARNINGS

(in thousands of dollars)

1931 1930 %chng

American Bank Note 1,019 1,523 -33.0

Borg Warner 325 1,097 -70.3


Chrysler Corp (-979) 180 -643.8

Corn Products Ref 2,389 3,152 -24.2

Curtis Publishing 4,654 6,533 -28.7

General Electric 11,488 15,042 -23.6

General Foods 5,572 5,990 -6.9

General Motors 28,999 44,968 -35.5

Gillette 1,421 2,164 -34.3

Hudson Motor Car 226 2,316 -90.2

Hupp Motor Car (-680) 66 -1130.3

McGraw Hill Pub 372 534 -30.3

Montgomery Ward (-1,783) (2,318) 30.0

National Cash Regs (-373) 912 -140.8

Otis Steel 20 634 -96.8

Parkard Motor Car 113 2,654 -95.7

du Pont 12,656 17,347 -27.0

Studebaker 809 1,347 -27.0

Westinghouse Elec (-2,885) 4,546 -163.4

In studying the first quarter earnings for1931, I found that on a broad basis, disre-garding individual size of each corporationand without any weighting, that the oncegreat auto industry reported a 271% de-cline in first quarter ’31 earnings. The ex-panding electric industry reported a 93.5%average decline in earnings. Two of theleast adversely affected industries werepublishing, off 30.6% and food processors(not agricultural producers), off 15.5%.


334

It is ironic that when the stock market firstbegan to crack back in 1929, many blamedthe demise upon the "optimistic" state-ments by business leaders and politicians.If that line of thinking were valid, all theoptimistic statements during the early partof 1930 and in January-February 1931should have also supported the market. Inthe end, all the optimistic statements failedto have any effect. The public judges agiven situation by what it sees, NOT by whatit hears. Everyone was bullish back in 1929based upon the continually rising prices ofcommon shares, NOT based upon thewords of Hoover or anyone else.

It was also in March 1931 that WallaceBrett Donham, dean of Harvard’s Gradu-ate School of Business Administration,published his book entitled: "BusinessAdrift" (McGraw-Hill). In this contempo-rary philosophical piece of the era, Don-ham struck at the heart of many issues."How can we as businessman within theareas for which we are responsible, bestmeet the needs of the American people,most nearly approximate supplying theirwants, maintain profits, handle problems ofunemployment, face the Russian challengeand at the same time aid Europe and con-tinue most to or disturb least the cause ofinternational peace?" Essentially, Donhamwarned that the U.S. should not engage inruthless competition with Europe. He feltthat such a trade war would eventually leadto the spread of communism throughoutEurope and even into Britain itself, causingthe destruction of Western civilization.

Donham’s views were quite forceful. Onthe Sherman Anti-Trust Act, he said: "Thetime has come for a complete reappraisal ofthe attitude toward competition which isexpressed in the Sherman Act." On theissue of unemployment he warned: "Unem-ployment is as much a general social prob-

lem as it is a business problem and...solu-tions...must be worked out by business andpolitics in combination... The whole princi-ple of insurance as applied to unemploy-m e n t is u nsou nd . The r e me dy fo runemployment is work."

Donham also warned that "the job of eachgeneration is to consider not only economictheory but the whole gamut of the complexsociological factors existing at the time andto stimulate progress...So far as possible itshould avoid creating new dangers for itssuccessors...I have, however, no doubtabout the soundness of my conclusion thatwe must have a philosophy, a plan, and amethod of thinking about the future. With-out these, the influence of American busi-ness on civilization will be destructive...Thedanger in our situation lies not in radicalpropaganda, but in lack of effective busi-ness leadership. Great problems, upon thedecision of which the whole history of thefuture may turn are receiving no adequateattention. Even the mechanism of thought


335


336


337

necessary to the rational handling of suchproblems is not understood. I see nowheresigns of a general philosophical attack onthe problems of the relationship of Ameri-can business to civilization."

Donham neither came out against thetariff issue nor in direct favour of it. But hedid advocate a tariff system for those indus-tries in which their demise would lead to adrastic change in the social structure. Hewas against tariffs to protect newly develop-ing industries which would attack the oldestablished industry in another nation.

Donham was correct. The issue of unem-ployment insurance did not stop right thereand the reasoning behind the issue did notstrike at the problem itself. But from theunemployed’s perspective, it at least pro-vided food to sustain one’s family. Thephilosophical issues of which Donhamspoke were never addressed. Governmentcontinued to broaden its powers with littleforesight to the damage it might create forfuture generations. The anti-trust lawswere never repealed and they were used toeventually carve up AT&T in the 1980s,which did not save the consumer anythingbut instead seriously raised the costs inmany areas on the local level. It is doubtfulthat the anti-trust laws have ever been suc-cessful in protecting the consumer. Theyhave merely added to the arsenal of weap-ons which government has at its disposal formanipulating the free enterprise system.

Indeed, there were many issues of philo-sophical debate. One of the primary argu-ments resided within the issue of wages.Henry Ford had become the symbol of thetheory that if wages could be maintainedthat in the long run purchasing power of theconsumer would prevent a depression. Youwill recall in the 1929 chapter that wequoted Ford’s famous statement on this is-

sue made back in December 1929 followingthe Hoover White House conference withbusiness leaders. There was considerabledoubt about this theory by April 1931, par-ticularly when the dismal first quarter earn-ings were released and the 1930 low wasviolated in the stock market.

Despite the claims from the high-wagersthat maintaining high wages would increasepurchasing power and speed the recovery,no evidence of this theory was present.Many of the opposition were bankers. Thefamous Melvin Traylor of First National ofChicago, former adversary of BenjaminStrong back in 1927, said that "employersmust be as quick to recognize the real wage(based on purchasing power of the dollar)in a rising market as labor must be to rec-ognize the real wage in a falling market."Others argued that by lowering wages itwould reduce the cost of production,thereby reducing retail prices and stimulat-ing purchases, which would speed recovery.Supporters of the high-wage theory warnedthat reducing wages would be socially dan-gerous and that it was not fair for the richboard directors to squeeze the workingman’s salary. The arguments were logicalfor both sides, but the reality of events indi-cated that maintaining high wages did notprevent the Depression from worseningand in many cases it threatened the survivalof industry during such a sharp contractionin the business cycle. Labour may have re-ceived their high wages at first, but confi-dence in turning around and spending theirearnings was not there. Hoarding of goldcontinued to rise thereby reducing the ve-locity rate of money turnover by 22% fromthe previous year as the second quarter of’31 began.

Indeed, gold became very attractive bothin physical form as well as in gold stocks.One example of this was the performance


338

of Noranda Mines, Ltd, a large copper andgold producer in Canada. Noranda’ s earn-ings for 1930 were $3,842,000 against$4,287,000 during 1929. Despite this de-cline, stockholders did not become discour-aged. In late March news came out thatNoranda had just struck a new vein of gold.The stock traded on the New York CurbExchange and on the Toronto Stock Ex-change. It was steady at the $17 level priorto the news and then buying activity soaredtaking the price of the stock up to $27 de-spite the broadly declining stock market.

Noranda was a larger producer of copperthan gold and, indeed, today it is still betterknown for its copper than its gold mines.This stock had peaked at $44 during 1929and fell to $17 prior to the news of this newdiscovery. The total value of Noranda’soutstanding 2.2 million shares jumped backby $22 million U.S.

Homestake Mining is perhaps a morepure example of a gold stock. From thehigh of $100 back in 1906, Homestake fell$54, bottoming during the panic of 1907.During World War I, Homestake rallied to$135.50 in 1916, but failed to make a newhigh in 1919, stopping at $100 when thebroad market was moving into unchartedterritory. But Homestake continued to de-cline and eventually fell to its all-time lowof $35 in 1924, closing the year at $43. By1927, this stock rallied back to as high as$74.50 just prior to the central bank inter-vention which lowered interest rates in theU .S. in a n e ffo r t t o h e lp E u r o p e .Homestake continued to rally, but by 1929it had peaked at only $93 closing the year at$77. The Great Bull Market had failed totake Homestake to new highs for this cen-tury when virtually all other stocks ralliedsubstantially above previous bull markethighs.

As the depression began to set in,Homestake fell to $72, bottoming duringthe first quarter when all other stocks wererallying sharply. But as the broad marketdeclined, Homestake began to rally reach-ing $83 and closing the year at $79 7/8.Homestake then soared, gapping higher as1931 began. The low for the year was $81and as the international situation worsened,Homestake continued higher reaching$138 and closing 1931 at $129.

This was far from the high on this stock.During 1932, the yearly range was $163 to$110 and in 1933, it carved out a tradingrange of $373 to $145. Under the policiesof Roosevelt, Homestake flourished even-tually reaching $544 a share by 1936. Be-tween 1924 and 1936, Homestake hadappreciated 1,454%, far outpacing thebroad market quite easily. It was in 1937that Homestake split 8:1 and fell to its low-est point in 1942, reaching $23 which wasequal to $184 expressed in terms prior tothe split. It then rallied to $60.75 ($486 inpre-split terms) in 1945, culminating into itshigh for World War II. But that 1945 highhad not exceeded the 1936 high of $544when inflation was the primary fear at thetime, more so than geopolitical tensions.

It was in the May 18, 1931 edition of Timemagazine that a discussion about the Fed-eral Reserve’s latest move appeared - a cutin the discount rate to 1.5% which was thelowest in history for a central bank and thebottom for the Great Depression. "Anx-ious to give business a stimulant last week,the directors of the Federal Reserve Bankof New York slashed its rediscount ratefrom 2% to 1.5%. Money eased throughoutthe land. The immediate aim and probableresult was to aid England which has beenlosing gold to the U.S. Over a longer pe-riod, agreed bankers last week, it shouldencourage foreign financing in the U.S.,


339

likewise issues by domestic companies. Yetlast week the state of U.S. business was suchthat no sudden demand for funds was ex-pected, no immediate revival held likely."

Money had fallen to its cheapest rate forthe 20th century. Back in 1894, followingthe famous Panic of 1893, 30-day funds inNew York had fallen to 1% as money satidle in the face of a lack of confidence to-ward investing on the part of industry andcapital. Even as late as 1895, the all-timelow of 5/8 of 1% formed the bottom on theopen market discounts in London. Thistime was no different. Capital, far from con-tented, was still afraid of investment. In-dustries by and large sought not to expandbut to contract as with this trend demandfor capital declined severely. This is per-haps evidence in itself that during periodsof economic expansion, demand for capitalrises from the business sector bidding upthe price of money (interest rates) in thesame fashion as increased demand causesthe price of a given stock to rise. Our mod-ern day perspective that the stock market

should rise during periods of declining in-terest rates and fall during periods of risinginterest rates cannot be supported when wereview the facts that history has provided.

In the commonly accepted form of mod-ern fundamental analysis, we have chosento only remember that interest rates and thestock market usually peak in unison but weforget that such unions at the top do nottranslate into the maxim of "rates up-stockdown." In reality, demand for both capitaland stocks tend to peak in unison but thereis no prescribed rate at which rising interestrates will change the trend of speculation orinvestment. In 1893, the stock marketpeaked when call money reached 75%. In1899, the stock market peaked after a brisktwo-year rally only when call moneyreached 184%.

In 1905, call money soared to 125%, yetthe stock market continued higher eventu-ally peaking in 1906 when call money was62% and the panic of 1907 took place whencall money rallied back to 125%. The rally

U.S Unemployment as % Civil Work Force


annu

al p

erce

ntag

e ra

te

1919 - 1940

1919 1924 1929 1934 1939

26

24

22

20

18

16

14

12

10

8

6

4

2

0

U.S Unemployment Annual Rate Of Change


annu

al p

erce

ntag

e ra

te o

f cha

nge

as percentage of civil labour force

1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

1.8

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8


340

in the market, which came to a crest in 1916,did so when call money peaked at only 15%and the next rally in 1919 peaked when callmoney finally reached 30%. Even the peakin the market during 1929, which was threetimes greater than the high achieved in1919, came with call money rates at only20%. The amplitude of rallies cannot bemeasured in direct proportion to the ampli-tude in the call money rate. Although thedirectional movements are similar, the lev-els of previous highs and lows between thetwo do not offer any direct correlation.

It also follows, therefore, that sitting in thechairman’s position at the Federal Reserve,there is no way one could be sure to whatdegree manipulation of the discount ratewould be necessary to turn the tide withindemand. It has always been a hit and missaffair resulting in a serious problem from atiming perspective. The Fed reacts too lateand then compensates too late as well.There is no guide book to speculation andfree market manipulation that states defini-tively that if the discount rate is raised to

such and such point that demand will de-cline. In each case, the reasons for the vari-ous panics prior to 1929 were largely quitedifferent. In some cases, panics werecaused by a drastic drop in the gold reservesprompting a lack of confidence in govern-ment’s ability to meet its debts. This sentcapital fleeing from banks into selected se-curities and even into hoarding gold. Inother cases, panic was created by naturaldisasters which seriously disrupted the cashflow between various sectors of the UnitedStates sparking bank failures which gaverise to the birth of the Federal Reserve.

The Panic of 1837 saw heavy speculationin real estate and the subsequent collapsethereof. In the case of 1929, the speculationwas concentrated within the stock market,focusing within the industrial sectors whichwere expanding rapidly. During the early1900s, speculation was concentrated withinthe railroads as they became the bright newexpanding medium of innovation. And inthe panic of 1869, gold rose to $162 anounce in New York, a figure when adjusted

U.S. Changes in Monetary Gold Reserves

Raw Data Source: U.S. Balance of Paymnt

expr

esse

d in

mill

ions

of d

olla

rs

1919 - 1933

1919 1924 1929

800

700

600

500

400

300

200

100

0

-100

-200

-300

$20.67 per ounce


341

into 1980 dollars far exceeded $5,000 anounce.

The article provided previously on thislast discount rate cut to 1.5% specificallystated that the cut was instigated to helpease the pressure on Britain. Why did thestock market merely pause during earlyMay and then soon drop to new lows onceagain ? Why did the discount rate cut fail tostimulate business? To answer these ques-tions, we must move back to the events thatwere taking place in Europe during May of1931.

World War I and the Russian Revolutionboth had a profound impact upon the Euro-pean economy. First, Russia had become acommunistic state which severed a oncevital market for foreign trade among West-ern European nations. Russia was nolonger an importer of fine lace, cut glass orcrafted Swiss watches. It had degeneratedinto a nation that despised man’s artisticqualities and God’s divine guidance. Thissevered the right arm of European trade,

leaving pr imar ily its le ft arm whichstretched across the Atlantic to America.

Second, the urge for power and the spoilsof war had carved Europe into little pieces.Following the war, 12 new European statesemerged and with them, imposing tradebarriers through tariff laws sought to pro-tect each state against the others. The warof guns had been concluded, but this wasreplaced by a financial war striving for thattrade surplus as its ultimate goal.

In addition, the once great Danube Valleyhad been the Jewel of European productiv-ity. This spoil was chopped up and sharedby five nations. This left Austria in thepoorhouse. Vienna had once dependedgreatly upon the resources and businessthat came its way from that valley. It nowhad its once thriving economy cut off at thepass.

These measures along with the Treaty ofVersailles had isolated Germany and Aus-tria, reducing their former economic viabil-ity significantly. It was this combination of


342

losing vital economic resources withinEurope and the loss of Russian trade whichprompted great tariff walls throughoutEurope. Add to these problems the prac-tices of "publishing" paper money throughdeficit spending, which was monetized cre-ating higher and varied rates of inflation inEurope, and the mixture became a timebomb waiting to explode.

These circumstances led to the incentivetoward price fixing and cartels which hadtrained their sights upon the U.S. marketswhen Russia had effectively been elimi-nated from capitalistic trade. It was thisunusual set of problems which had givenbirth to the central bank manipulation ofinterest rates back in 1927 and the attemptswhich preceded it in 1925. The centralbank intervention did not strike at solvingthe problems; it merely attempted to throwmoney at them hoping that they would sim-ply go away. Instead, it weakened the U.S.position by allowing the U.S. to financenearly the entire free world single-hand-edly. Thus the situation was similar in some

respects to South America. All the loans inthe world have not corrected the internaleconomic problems. The loans havemerely postponed the inevitable until thatfinal tomorrow comes around.

Fears over the banking situation weretherefore just as alive in Europe as theywere within the United States. The accusa-tions that would arise during 1932 fromRoosevelt, charging that responsibility forthe worldwide depression lay with Hoover,were simply slanderous lies aimed at win-ning an election. There is no historical evi-dence that the depression resulted from anypolicies implemented by Hoover, nor wasits origin within the United States. Thetariff wars had raged on throughout Europebefore Smoot-Hawley, which was a re-sponse not an instigation.

Germany, for example, was saddled withreparation payments it could not make. Inturn any hope of achieving a trade surpluswas beyond reason. Germany was forced toborrow dollars in order to meet much of its

HOMESTAKE 1899-1985Price Movement Adjusted For Splits

1899 1909 1919 1929 1939 1949 1959 1969 1979

$3,000.0

$2,800.0

$2,600.0

$2,400.0

$2,200.0

$2,000.0

$1,800.0

$1,600.0

$1,400.0

$1,200.0

$1,000.0

$800.0

$600.0

$400.0

$200.0

$0.0


343

obligations, but without a trade surplus, ithad remained a credit risk in some respects.Austria was in no better shape. The twowere suffering greatly and they came toterms with each other on a customs agree-ment which would free up trade betweenthe two and which they hoped would revivetheir stricken economies.

It was when this agreement between Ger-many and Austria took place on May 10,1931, that financial war was declared by theFrench. France was perhaps the strongestEuropean nation as a result of its inten-tional undervaluation of the franc in 1928.This gave rise to substantial flows of goldinto France. Economically the undervaluedfranc and the fact that France was a heavilycommodity-oriented nation which had im-

posed substantial tariffs to protect its econ-omy both from the U.S. (prior to Smoot-H awley) and its European neighbors,meant that France suffered least among theWestern nations from the ills of depression.France protested the German-Austriancustoms agreement, calling it a violation ofthe Versailles Treaty. In this the Frenchwere not alone. Britain also protested fear-ing that this was the resurrection.

The French, however, virtually declaredwar financially. After the German-Aus-trian agreement was announced on March21, 1931, and the formal protesting periodhad lapsed, France immediately turned.The Bank of France accompanied by manyother French banks presented short-termAustrian bills which they held for redemp-


344


Rat

e of

Inte

rest

in %

1927 - 1932

1927 1928 1929 1930 1931 1932

6

5

4

3

2

1

0


345


346

tion. They did the same with their Germanholdings. It was estimated that France heldsome $300 million worth of these bills at thetime. This was the final straw which brokethe back of the European economic system.

Britain, struggling to maintain the poundat the par level of $4.86, still suffered froma decaying domestic economy. The over-valuation of the pound had caused stagna-tion economically. British goods were highpriced in the world market which did nothelp to stimulate a strong domestic recov-ery. Russia had been a close tie prior to therevolution and an important trading part-ner. Therefore, something had to give. Ifthe pound remained overvalued then thedomestic economy had to collapse. Thisstate of overvaluation could not be enduredforever.

It was in May that the Credit-Anstait Bankfailed in Austria, in part edged onward bythe French. This was the oldest and mostwidely respected banking house in Austria.Its losses exceeded its total capitalization.The failure of the Credit-Anstalt had severerepercussions throughout Austria. Numer-ous banks all turned to the National Bank

of Austria which quickly ran out of foreigncurrency reserves. Austria then had noother choice but to appeal to other nations.France, being the strongest, set the price asthe dissolution of the German-Austriancustoms agreement, which was a price Aus-tria felt was too high. Toward the end ofMay, the Austrians then turned to Britainand the United States for help when theAustrian National Bank, their equivalent ofthe U.S. Fed, was on the verge of collapse.The French would not cooperate at all.

The economic policy of Britain was stilllargely in the hands of one man - MontaguNorman. As Governor of the Bank of Eng-land since 1920, Norman’s unrealistic goalto maintain $4.86 on the pound at all costswas also accompanied by an internationaldream. Norman still saw Britain as theguiding light whose stature of former finan-cial greatness was to be reclaimed. But atthe same time, he was something of a tri-lat-eralist, so to speak. He believed in a Euro-pean community working together, unlikethe more self-centered aspirat ions ofFrance.


347



in m

illio

ns o

f dol

lars


1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

3400

3200

3000

2800

2600

2400

2200

2000

1800

1600

1400

1200

1000

800

600

400

200

0

U.S Balance of Trade with America


in m

illio

ns o

f dol

lars


1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

500

400

300

200

100

0

-100

-200

North & South Amer

U.S Balance of Trade with Asia


in m

illio

ns o

f dol

lars


1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

0

-100

-200

-300

-400

-500

-600

-700

-800

-900

Including Japan


348

Britain came to the aid of Austria in agallant fashion, advancing 4.5 millionpounds. Norman, perhaps wrongfully tosome degree, placed domestic British con-ditions second in this case in pursuit of hismore broadly based international dream.But whatever the event, the condition of thedecaying growth in British industry due tothe overvalued pound would have causedthe same events to transpire had Normannot rushed to the aid of Austria. The issueof whether this was the proper move or notis of no real concern. Someone had to tryto pull things together. However, it was theFrench who became a bit annoyed with the

British rescue mission, and in turn madematters worse. The French began sellingthe pound through the liquidation of theirsterling holdings, intentionally trying to getback at Britain. The financial warfare hadtaken on a new front - the pound sterling.

The problems which developed in Austrianaturally spread resulting in massive with-drawals of funds in Germany by even itscitizens. It was May 13, 1931 when riotsbroke out in front of Austria’s Credit-An-stalt (Kreditanstalt). On May 15, runs werereported throughout Hungary as well. By

France - Balance of Trade


in b

illio

ns

by value in billions of francs

1900 1910 1920 1930 1940

30

20

10

0

-10

-20

-30

Italy - Balance of Trade


in b

illio

ns

by value in billions of lira

1900 1905 1910 1915 1920 1925 1930 1935 1940

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

0

-1

-2

-3

-4

Great Britain - Balance of Trade


in m

illio

ns

by value in millions of pounds

1920 1922 1924 1926 1928 1930 1932

0

-50

-100

-150

-200

-250

-300

-350

-400

-450

-500

Japan - Balance of Trade


in b

illio

ns

by value in billions of yen

1920 1922 1924 1926 1928 1930 1932

0

-0.1

-0.2

-0.3

-0.4

-0.5

-0.6

-0.7

-0.8

-0.9


349


350

the end of May these pressures mountedagainst the Austrian National Bank.

Germany had nowhere to turn. Francewould not come to its aid while still expect-ing payments in turn from Germany. Thevarious payments on reparations and warloans between nations resulted in about $1billion of which the U.S. actually receivedonly $250 million annually. As Europeanbanking failures spread along with the quietfinancial war which was raging in the for-eign exchange markets, the Fed got into theact by reducing the discount rate to 1.5% inhopes of making it less attractive for foreign

France - Consumer Price Index 1980=100


annu

al p

erce

ntag

e ra

te o

f cha

nge

annual rate of change

1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

Japan - Wholesale Price Index 1980=100


annu

al p

erce

ntag

e ra

te o

f cha

nge


1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

-20.00%

Germany - Consumer Price Index 1980=100


Ann

ual R

ate

of C

hang

e

Annual Rate of Inflation

1920 1925 1930 1935 1940

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8

-1

Italy - Consumer Price Index 1980=100


annu

al p

erce

ntag

e ra

te o

f cha

nge


1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

U.S Consumer Price Index 1980=100


annu

al p

erce

ntag

e ra

te o

f cha

nge


1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

1

0.5

0

-0.5

-1

-1.5

-2

-2.5

-3


351

capital, which came pouring into New Yorklooking to get away from the chaos thatreigned throughout Europe. It should comeas no surprise that the dollar began tostrengthen as the "smart" money set sailonce again for the United States.

The Fed’s actions were not by any meansdomestically oriented. Britain had beenlosing gold to the United States as capitalfled the financial war zone. As a speculator,it was an easy bet. You essentially couldshort the pound by transferring into dollars.The downside was perhaps a penny at bestand the upside was perhaps a return to the$3.20 level that had been seen following thepanic of 1920. If you had any brains, youknew what to do - buy dollars!

The problems throughout the Europeancommunity had indeed emerged into a fi-nancial war which had replaced guns withtariffs, restrictions, quotas and interest ratemanipulations. The Central Europeanstates raised their interest rates in an at-tempt to attract foreign capital, the oppo-site move of the Fed. But that failed

because confidence was far from presentand no exorbitant rates of interest wouldsuffice in restoring stability. This was thenfollowed by a decree that capital was notpermitted to leave the country. This mayhave solved the flight of capital, but it cre-ated a drastic side-effect - a halt to interna-t ional trade. If capital could not beexported, commerce could not buy anygoods. This was worse than high tariffs.Some increased their restrictions on im-ports and tried to stimulate their own ex-ports. But this failed as diverse approachescontinued to disrupt trade, which onlyheightened the urge for fleeing capital tothe United States. In effect, this was thefirst crack in the gold standard. Although noone officially went off the gold standard inMay of 1931, if the exportation of capitalwas prohibited then no gold payments weremade. Thus, the same result as abandoningthe gold standard transpired among theCentral European states.

As June began, reports that some Euro-pean banks had been selling U.S. securitieswere confirmed. This did not inspire a posi-

French Francs Per Dollar

Source: Wall Street Joural Closing

Fra

ncs

per

U.S

. Dol

lar

MONTHLY: 1928 - 1931

1928 1929 1930 1931

25.66

25.64

25.62

25.6

25.58

25.56

25.54

25.52

25.5

25.48

25.46

25.44

25.42

25.4

25.38


352


353

tive feeling among U.S. stock traders whowere now confused by the whole situation.Herbert Hoover wrote in his memoirs(MacMillan Co., 1952) this comment on thecrisis:

"During this new stage of the depression,the refugee gold and the foreign govern-ment reserve deposits were constantlydriven by fear hither and yon over theworld. We were to see currencies demoral-ized and governments embarrassed as feardrove the gold from one country to another.In fact, there was a mass of gold and short-term credit which behaved like a loose can-n o n o n t h e d e ck o f t h e wo r ld intempest-tossed era."

In June of 1931, the European press beganto point the finger at the United States.They tried to assert that it was the economicpolicies of the U.S. that were attracting theworld’s gold, creating the flight from Euro-pean stock markets and the foreign ex-change markets as well. The U.S. goldreserves had climbed by $600 million, de-spite the Fed’s cut in the discount rate.

Clearly, those charges by the Europeanpress were totally unfounded. AlthoughEuropeans sought to point the finger at theU.S. for causing their economic difficulties,the problems had their origin in Europe.Despite the depression in the U.S., it wasviewed by world capital as still the safestplace at that point.

The financial warfare in Europe had cre-ated a massacre within the banking indus-t ry. The Federal Reserve ’s textbookattempt to lower U.S. interest rates to stemthe influx of capital and provide an incen-tive for capital to flow toward Britain failed.Confidence was not restored and higherrates of interest were not among the con-cerns of nervous capital - outright fear ofloss dominated the free markets.

Hoover believed that with the economicconditions strained as tight as they werethroughout Europe, that these intergovern-mental payments were adding pressurewhich tended to weaken confidence. Thisperhaps was evident when one considersthe intentional actions on the part of France


354

at this time. As early as May 11, Hooverhad proposed to Secretaries Stimson andMellon that they should study these inter-governmental payments and report upontheir recommendations if any action shouldbe taken. On June 5, Hoover called Millsto the White House and proposed that amoratorium of one year on all intergovern-mental payments should be implemented.Mills and Stimson agreed, but Mellon ob-jected. The next day Mellon left on a sched-uled trip to Europe, Mills became actingSecretary of the Treasury and Hoover be-lieved that with Mellon out of the way per-haps his plan might be able to go forward.

On June 7, the German Finance Ministerpublicly stated that the Austrian bankingcrisis would spread to Germany in about 60days in his opinion. Of course, after makingsuch a definite public statement, the panicbegan to spread immediately. Virtuallyevery German bank was under siege andnow foreign banks began wholesale de-mands for the immediate redemption ofGerman trade bills and bankers’ accep-tances.

The situation was obviously becomingmuch more serious. After arriving inEurope on June 18, Andrew Mellon had"frantically" telephoned Hoover, accordingto Hoover’s memoirs, reversing his formeropposition to a moratorium on intergov-ernmental payments. Mellon then advo-cated qu ick act ion fear ing that theAmerican financial system was in gravedanger from the events which were tran-spiring in Europe.

President Von Hindenberg of Germanyhad sent an urgent letter of appeal toHoover which warned that Germany was indanger of collapse. The letter read as fol-lows:

"Mr. President:

The need of the German people which hasreached a climax compels me to adopt theunusual step of addressing you personally.


355

The German people have lived throughyears of great hardship culminating in thepast winter, and the economic recoveryhoped for in the Spring of this year has nottaken place. I have, therefore, now takensteps, in virtue of the extraordinary powersconferred upon me by the German Consti-tution, to insure the carrying out of the mosturgent tasks confronting the Governmentand to secure the necessary means of sub-sistence for the unemployed. These meas-ures radically affect all economic and socialconditions and entail the greatest sacrificeson the part of all classes of the population.All possibilities of improving the situationby domestic measures without relief fromabroad are exhausted. The economic crisisfrom which the whole world is suffering hitsparticularly hard the German nation whichhas been deprived of its reserves by theconsequences of the war. As the develop-ments of the last few days show, the wholeworld lacks confidence in the ability of theGerman economic system to work underthe existing burdens. Large credits re-ceived by us from foreign countries havebeen withdrawn. Even in the course of the

last few days the Reichsbank has had tohand over to foreign countries one third ofits reserves of gold and foreign currency.The inevitable consequence of these devel-opments must be further serious restrictionof economic life and an increase in thenumbers of unemployed who alreadyamount to more than one third of the totalnumber of industrial workers. The effi-ciency, will to work, and discipline of theGerman people justify confidence in thestrict observance of the great fixed privateobligations and loans with which Germanyis burdened. But in order to maintain itscourse and the confidence of the world inits capacity, Germany has urgent need ofrelief. The relief must come at once if weare to avoid serious misfortune for our-selves and others. The German peoplemust continue to have the possibility ofworking under tolerable living conditions.Such relief would be to the benefit of allcountries in its material and moral effect onthe whole crisis. It would improve the situ-ation in other countries and materially re-duce the danger to Germany due to internal

Net Differential Between UK & US Yields

Premium of UK over US rates

Per

cent

age

Rat

e D

iffer

entia

l

20 yr long-term rates

1919 1921 1923 1925 1927 1929 1931 1933

1.6

1.4

1.2

1

0.8

0.6

0.4

0.2

0

-0.2

-0.4

-0.6

-0.8

-1

-1.2

-1.4


356

and external tension caused by distress anddespair.

You, Mr. President, as the representativeof the great American people, are in a po-sition to take the steps by which an imme-diate change in the situation threateningGermany and the rest of the world could bebrought about.

Von Hindenberg

Up to now, most of Hoover’s discussionswith various people were kept confidential.He had conferred with members of Con-gress and wanted their support before mak-ing any proposals to Europe only to havethe Democrats shoot them down. When itappeared that he had the necessary supportto insure approval of his moratorium pro-posal, he opened dialogue with other na-tions.

Hoover’s proposal was leaked to the pressby Senator King, but it was not reported inan accurate fashion. This forced Hoover tomake a public statement on June 20, beforeany other nations had agreed. On the 29thof June, the New York Times hailed themeasure as being constructive and the stockmarket responded favorably as well.

World confidence seemed to take a pauseon Hoover’s moratorium proposal. Thestock markets in both Germany and Francerallied strongly along with Britain’s, but theleadership was clearly taken by the UnitedStates. This rally which took place duringJune of 1931 would later be dubbed the"Moratorium Rally" once it was perceivedto have been only a glitch in the ultimatefate of the market. But for now even com-modities leaped forward with a startlingsense of optimism.

The Dow Jones Industrials rallied sharplyon the moratorium news from a low of justabove the 120 level to close at 157 duringJune of 1931. This was a smashing rally.And it was the strongest since the declinebegan on a percentage basis - nearly a 30%move. In London the favorites seemed tobe across the board, but sharp gains werenoted among the breweries, rubbers,home-rails, and silk companies. Interna-tional stocks trading in London were alsovery popular including British-AmericanTobacco and Imperial Tobacco and even theSouth African mining shares.

In France, the rally in equities was led byBanque de France, Coty, Ford, Citroen, andeven Compagnie Universelle du CanalMaritime de Suez. In Germany, the mostpopular was A.E.G., the German GeneralElectric Company. Other favourites wereI.G. Farbenindustrie, the large dye trust andVere inigte Stahlwerke (U nited Stee lWorks).

Time magazine reported on the commod-ity rally in its July 6, 1931 edition as follows:

"But more significant than the rise in stockprices, last week was a worldwide gain incommodities. The most important gain wasthat registered in silver. The only calmthing about the Bomboy Silver Bullion Ex-change is the sacred cow which, fat and lazy,spends most of her time in somnambulisticrepose, blinking sadly and chewing her cud.During the Depression the sacred cow hasseen many disconcerting things. Silver hasdropped from 1929’s high of 57.5 cents tothe historic low of 25.75 cents per fineounce. The only notable interruption wasthe remarkable corner staged last year byChimauram Motilal, aged H indu whodrives in a Cadillac, carries a Malacca stick,wears but a white lion-cloth and a turban.But, last week with much yelling and ges-


357

ticulating Bombay silver buyers shoved theprice up 166%. The gain was of paramountimpor tance to t he buying-power o f500,000,000 Far-Easterners. To China itwas especially welcome. Long-coated silk-trousered members of the Shanghai GoldStock Exchange of Kiukiang Road boughtsilver by the simple method of selling gold.How desperate is China’s state is well illus-trated by the ugly rumors heard in Singa-pore concerning the affairs of Tan Kah Kee,great rubber, pineapple, biscuit and bricktycoon, patron of Amoy University. Once acoolie, he became a multi-millionaire, isnow thought to be heavily in debt, frantic-ally trying to incorporate his private affairs.

"In addition to silver practically all com-modities rose, including the base metals.The most spectacular performer of thesewas volatile copper which jumped from 8cents (New York) to 9 cents as domestic andforeign buyers threw large orders into themarket. Lead and zinc followed along.Typical of the increase in trading was theexcitement in Manhattan’s Raw Silk Ex-change where trading reached almost 4,000

bales a day after being at 80 a few weeksago. Startled pages and clerks hurried toput their summer linen-suits on a fortnightahead of time. In Tokyo, Japanese bearstalked of hara-kiri. On the Coffee & SugarExchange, Manhattan coffee continued itsrecent rise which had begun to die out;sugar started its first rally in months. Some$25,000,000 was added to the value of sugarsupplies. Along with gold coast nativefarmers, men gathered in British villages toreceive cable dispatches which told the gladtidings of what was happening on the NewYork Cocoa Exchange. Cotton, despite thebearishly small decrease in acreage, rosethroughout the world. Textiles rose in theU.S. and on the great Manchester RoyalExchange. In the Chicago wheat-pit 36 sto-ries under the 40-ft., 15-ton aluminumstatue of Ceres which is the Chicago Boardof Trade Building’s talisman, grains ralliedsmartly, sent the theoretical total value ofU.S. grains up $300,000,000. On the NewYork Rubber Exchange, where recently lessthan a dozen members have come down totrade, the volume increased 5005. Specula-tive buying from Wall Streeters was cred-


358

ited with having much to do with rubber’scomeback.

"While renewed confidence and the risein commodities were the most importantevents of the week, the news-index ofworldwide change was the New York StockExchange. Performing in a spectacularmanner, that great market once againproved its world leadership. There werecheers when United States Steel againcrossed par, a triumphant return from therecent nadir of $83 and an 1/8th. Twenty-sixleading stocks gained $4,159,000,000 invalue. Bullish rumors ran wild; there weretales of tremendous pools being formed,huge mergers in the making. Concretebullish news in addition to the moratoriumwas the favorable decision to Radio Corp.,the raising of the wholesale cigarette price,the declaration of regular dividends byWestinghouse, Anaconda, Baltimore &Ohio. Stocks with interests in South Amer-ica soared on a baseless rumor that thePresident would soon make an importantannouncement regarding credits to LatinAmerican countries. Long deferred invest-ment buying appeared. Vivid tales weretold of big bears trapped, fretting behindthe bars of higher prices. One venerablemember of the exchange was heard to singthat old bull war chant of the ChicagoWheat-Pit: "He who sells what isn’t his’nmust buy it back or go to prison." And eventhe most sanguine of optimists was willingto concede that the song was applicable inany market last week, that much of the re-covery’s violence was due to the running-inof bears who for months have sold "whatisn’t their’n."

The jubilant "Moratorium Rally," need-less to say, did not last. In the July 20, 1931edition of Time magazine, the commentarytook on a distinctively different undertonewhich was much more brief and to the

point. "Hope engendered by the Morato-rium and the Moratorium Market on worldexchanges failed to find reflection in impor-tant business indicators up to last week.Important straws showed that Depres-sion’s ill-winds were not yet blown out."

Within a week of Hoover’s public an-nouncement of his moratorium proposal,15 governments had agreed with the plan"unconditionally!" The only important op-ponent was France who still held bitter re-sentment toward Germany. The Frenchhurried excuse after excuse as to whyH oover ’s Morator ium should not beadopted. With each excuse that was an-swered and set aside, another quickly fol-lowed. The French kept this up for days,delaying Hoover’s actions as much as pos-sible.

The banking crisis in Central and EasternEurope raged on during this time when theFrench were the only dissenters among thegroup of nations still insisting that Germanyshould not be relieved of her reparationpayments. Then on July 5, Hoover hadabout all he was willing to take. Hooverinformed France that he had securedenough support among other nations forthe proposal and he did not need France’sapproval. He told France that it may con-tinue to extract its payments, but that allother nations including the United Stateswould not relieve France of its obligationseither. Finally, the French had to agree.Hoover would effectively isolate them ifthey refused to cooperate.

The French tactics had sparked severedivisions within Europe. The level of con-fidence was restored only briefly as manyfeared that France would still apply pres-sure to the pound as well as to the outstand-ing short-term credits of Germany. Thebanking crisis continued almost unabated


359

in Germany and Hungary in particular, aswell as in the entire Eastern Europeangroup. By mid-July, virtually all German,Austrian, Hungarian and Eastern Euro-pean banks were closed.

On July 20, 1931, a conference was calledin London to discuss the European bankingcrisis. Secretaries Mellon and Stimson at-tended. The French surprisingly proposedthat the British, French and Americansshould lend $500 million to Germany. TheFrench knew that this proposal would notbe very popular in the United States and italmost appeared as if they were trying toforce Hoover to publicly decline their pro-posal for propaganda purposes.

Hoover asked the Federal Reserve to pro-vide information that would give him a fairappraisal of the extent of outstanding Ger-man short-term credits held by U.S. inter-ests. The Fed replied that they estimatedthat only $400 to $500 million of theseshort-term debts were held by U.S. inter-ests. Hoover wrote in his memoirs: "Wor-rying over the matter during that night I wassomehow not satisfied with this report, and

in the morning I directed the Comptrollerof the Currency to secure an accurate re-port on such American holdings direct fromthe banks." The next day Hoover washanded a report that was based on a directsurvey. The numbers that Hoover washanded came out to be $1.7 billion. Thereport broke them down, stating that about$1 billion was held by banks whose capitali-zation, in the event of the default of Ger-many, would be placed in great danger.Hoover wrote that he was appalled at thenews. He further added: "Here was oneconsequence of the Reserve Board main-taining artificially low interest rates and ex-panded credit in the United States frommid-1927 to mid-1929 at the urging ofEuropean bankers. Some of our bankershad been yielding to sheer greed for the 6to 7 percent interest offered by banks in theEuropean panic area."

Hoover then inquired of the Bank of Eng-land as to the extent of their holdings ofthese bad, short-term G erman debts.Within two days the Bank of England re-plied that about $2 billion of these Germandebts were held by British banks and theirdominions including Sweden, Norway,Holland, Denmark and Switzerland. Theywarned that untold amounts were also heldby Latin America and parts of the Far East.The combined debts of Germany, Austria,Hungary and other Eastern European na-tions on a short-term floating basis ap-peared to slightly exceed $5 billion. Thiswas a figure which was almost equal to thepeak in money which had been lent on callwithin the stock market back in 1929. Thisfigure did not include the outstanding long-term bond issues, war debts or municipalissues which had been floated and heldlargely by private investors.

The bottom line had become clear. Ger-many was able to meet its reparation pay-


360

ments only through the floating of debt in-struments. Nothing had been truly gained.Many of the buyers of German bonds wereprivate citizens and then the proceeds hadbeen paid to the foreign nations who de-manded reparation payments. It was a giantshell game that transferred the earnings ofthe small investor into the hands of govern-ment through the medium of bonds whichhad offered 6%-7% in interest income.Germany was not alone in this tactic. MostEastern European nations were in effectborrowing from Peter to pay Paul. In real-ity, this was very similar to the Ponzischeme. Individuals go to jail for such prac-tices, but governments seemed to be ex-cused and bailed out, chalking it up to badmanagement.

Hoover wrote: "It was now evident whythe European crisis had been so long de-layed. They had kited bills to A in order topay B and their internal deficits. I don’tknow that I have ever received a worseshock. The haunting prospect of wholesalebank failures and the necessity of saying nota word to the American people as to the

cause and the danger, lest I precipitate runson our banks, left me little sleep. The situ-ation was no longer one of helping foreigncountries to the indirect benefit of every-body. It was now a question of saving our-selves."

Hoover again rose to the occasion, tryingto arrive at some solution. Lending moremoney would not solve the problem. Thevast, intricate entanglement of the foreigndebt situation was a time bomb waiting toexplode at any moment. Hoover’s proposalwas to call a complete "standstill" among allbanks everywhere, preventing anyone fromcalling upon German or Central Europeanshort-term obligations.

France still pressured for a $500 millionloan to Germany. Hoover refused to goalong with it. Mellon warned Hoover thatif the U.S. did not go along with the plan theFrench intended to place all the blame onthe United States, and he warned that hewas playing into the hands of the French.Mellon strongly urged Hoover to accept theFrench proposal. Hoover lost his patience,


361

as he put it, and informed Mellon that his"standstill" plan was being released to thepress at that very moment. When the newscame out, the London Conference wasforced to accept Hoover’s proposal becausethe truth was at last coming out.

A group of New York bankers complainedto the White House and warned that theywould not comply with the standstill. Theydemanded that Hoover loan money to Ger-many so it could pay its debts which thebankers held. As Hoover wrote: "Mynerves were perhaps overstrained when Ireplied that, if they (bankers) did not acceptwithin twenty-four hours (his standstill pro-posal), I would expose their banking con-duct to the American people." Needless tosay, the bankers realized Hoover’s determi-nation and his opinion that the taxpayershould not pay for the banker’s problems,which had been created by their eager so-licitation of private citizens for foreign se-curities, and the bankers reluctantly backedoff. Indeed, the actions of the banks and theFederal Reserve had bordered on the vergeof treason as they acted as willing partici-pants in what proved to be a game of musi-cal chairs with the unsound fore igngovernmental debt instruments.

Bulgarian - Lev


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.0073

0.00729

0.00728

0.00727

0.00726

0.00725

0.00724

0.00723

0.00722

0.00721

0.0072

0.00719

0.00718

0.00717

0.00716

0.00715

0.00714

0.00713

0.00712

0.00711

0.0071

Czechoslovakian - Korun


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.02968

0.02967

0.02966

0.02965

0.02964

0.02963

0.02962

0.02961

0.0296

0.02959

0.02958

0.02957

0.02956

0.02955

0.02954

0.02953

0.02952

0.02951

Greek - Drachma


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.01335

0.0133

0.01325

0.0132

0.01315

0.0131

0.01305

0.013

0.01295

0.0129

Hungarian - Pengo


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.1755

0.1754

0.1753

0.1752

0.1751

0.175

0.1749

0.1748

0.1747

0.1746

0.1745

0.1744

0.1743

0.1742


362

The situation was still far worse than thereports that were given to Hoover at thetime. While he suspected that the short-term debt which had been brought to astandstill was about $5 billion according toboth U.S. and British sources, it was notconfirmed until a year later when the Bankfor International Settlements issued a re-port illustrating that the amount was actu-ally $10 billion! The BIS wrote: "At thetime (1931), the magnitude of this indebt-edness was not known..."

Hoover’s measures had brought the situ-ation under control, but only momentarily.The United States had been spared fromwholesale banking failures due to panic thatwould have certainly spread had the fullextent of the bad foreign loans been known.But Europe was still weak and the attacksthat France had made against the pound inretaliation for the British helping to bail outAustria went deep into undermining theentire world economy. Not only was thelevel of international debt seriously high,but the greatest of all dangers remained inconfidence. Once that confidence was lost,the momentum of events that followed wasbeyond the control of everyone involved.

Polish - Zloty


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.114

0.1139

0.1138

0.1137

0.1136

0.1135

0.1134

0.1133

0.1132

0.1131

0.113

0.1129

0.1128

0.1127

0.1126

0.1125

0.1124

0.1123

0.1122

0.1121

0.112

Yugoslavian - Dinar


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.018

0.0179

0.0178

0.0177

0.0176

0.0175

0.0174

0.0173

0.0172

0.0171

0.017

Portugese - Escudo


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.05

0.049

0.048

0.047

0.046

0.045

0.044

0.043

0.042

0.041

0.04

0.039

0.038

0.037

0.036

0.035

0.034

0.033

0.032

0.031

Rumanian - Leu


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.0063

0.00625

0.0062

0.00615

0.0061

0.00605

0.006

0.00595

0.0059


363

The problems could not be assessed quicklyenough nor could politicians agree amongthemselves as to the proper correctivemeasures which were necessary.

The stock market was taking a brief pauseas everyone who understood the situationand its severity hoped and prayed that con-fidence would gradually be restored inEurope. But the French were still causingproblems. On July 24, 1931, the Frenchbegan sizable withdrawals of gold fromLondon. French banks moved $800 millionin gold out of British banks. It was clear thatthe French attack on the pound was notover. This move was quickly noticed amongother central banks and confidence provedto be a vague memory. The dreams of Mon-tagu Norman had been shattered onceagain.

Britain had been built back to some de-gree and it remained in the position whichwas sort of a central clearing center amongnations. It held sizable gold deposits fromvarious nations and lent gold to others.When the French began to withdraw theirgold deposits, other nations followed suit.Therefore, the final situation amounted towhat one could loosely equate to a run onthe IMF (International Monetary Fund) intoday’s terms.

Essentially, the depositors of gold withLondon were cashing out but the debtors,chiefly Central and Eastern European na-tions including Austria and Germany, couldnot be called upon to repay their loans im-mediate ly. The Bank of E ngland at-tempted to stem the run by implementingthe typical textbook action - a hike in inter-est rates. The Fed held its discount rate at1.5% in the United States. The run was notimpressed by the higher rate of interestoffered by the Brits. When confidence isshaken, NO LEVEL OF INTEREST IS

Chilean - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.1222

0.122

0.1218

0.1216

0.1214

0.1212

0.121

0.1208

0.1206

0.1204

0.1202

0.12

0.1198

0.1196

Columbian - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.981

0.98

0.979

0.978

0.977

0.976

0.975

0.974

0.973

0.972

0.971

0.97

0.969

0.968

0.967

0.966

0.965

0.964

0.963

Brazilian - Mil Reis


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.13

0.12

0.11

0.1

0.09

0.08

0.07

0.06

0.05


364

ENOUGH IF PEOPLE FEAR A DE-FAULT. Capital is only attracted to a higherrate of interest when all things upon whichconfidence is dependent remain equal. Ifone nation or a person is seen to be in aweakened state and on the verge of bank-ruptcy, lenders are generally rarer than ahot summer night in Siberia.

On August 1, 1931, the Bank of Englandinquired of the U.S. government whether itwould be permissible to borrow $250 mil-lion from private U.S. banks. Hoover en-co u r a ge d t h is a ct io n t o b e t ake nimmediately. But the selling pressureagainst the pound by private investorsforced the Bank of England to request a$400 million loan on the 26th of August.Both loans were made giving Britain a $650million loan, but even this proved to be farfrom enough to stem the tide.

Within Britain, turmoil had besieged thegovernment. Montagu Norman st illreigned as a dominant force within eco-nomic policies. Norman turned to hishandy textbook and relied upon what undernormal conditions would dictate the solu-tion to the problems at hand. In addition toraising the interest rates, which failed toprevent the panic withdrawals, he then sur-mised that confidence could only be re-st o r e d b y cu t t in g go ve r n m e n texpenditures, thereby forcing on its ownpeople a greater level of deflation. TheBrits also organized what was dubbed the"May Committee" which reviewed publicexpenditure. This committee recom-mended drastic cuts in government expen-d i t u r e s, in clu d in g a 20% cu t fo rgovernment employees and unemploymentbenefits for its people. Only two out of theseven members of this committee dissentedon this opinion.

Peruvian - Libra


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

Uruguayan - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

Chinese - Tael


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.7

0.65

0.6

0.55

0.5

0.45

0.4

0.35

0.3

0.25


365

Norman obviously relied upon the reportof the May Committee in his suggestionswhich he delivered to the government.During August this led to the resignation ofmost of the Labour cabinet, which simplydisagreed that the salaries of governmentworkers and unemployment benefitsshould be cut drastically. In the aftermath,the formation of Macdonald’s NationalGovernment resulted.

Norman demanded that these drastic cutsmust be made immediately and he madethem a prerequisite for obtaining the loansfrom the United States. These were theonly steps that could save the pound, Nor-man asserted. From Invergordon, newsspread around the world that the BritishNavy was in "mutiny" as a result of the dras-tic cut in pay. This news of mutiny did nothelp restore confidence whatsoever and thepay cuts had been hastily pushed throughupon Norman’s direction.

Great Britain - Taxes as % Wages


Ann

ual R

ate

of C

hang

e

on a collected basis - Rate of Change

1921 1923 1925 1927 1929 1931 1933 1935 1937

0.2

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08


366


367


368

Another committee, which history has re-ferred to as the "Macmillan Committee,"presided over finance and industry matterswithin the British government. Two promi-nent men sat on this committee; they wereJohn Maynard Keynes and Ernest Bevin.The Macmillan Committee had recom-mended that the pound should be devalued.Of course, Norman had disagreed with thiswholeheartedly. Keynes was also opposedto devaluation, but it is said that on August5, Keynes wrote a letter to the Prime Min-ister in which he reversed his opinion andadvocated a devaluation of the pound usingthe words: "The game is up."

Finally, on September 21, 1931, the Bankof England abandoned the gold standardand effectively defaulted on its foreign ob-ligations. This, added to revolutions inSouth America, defaults by Germany, Aus-tria and most of Eastern Europe, left theUnited States as one of the few nationswhich still clung to the gold standard.

It is important to note that the normalactions which a central bank should take tostem a run on its banks and currency weretaken but failed to prevent the panic fromspreading. Yet today our central bankshave not revised these guidelines and underthe same circumstances they will do thevery same thing once again. Britain’s meas-ures considered the welfare of its own peo-ple as second to that of maintaininginternational confidence in the pound. Itraised interest rates which battered an al-ready weakened domestic economy. Thedrastic pay cuts of 20% would again bemeasures which could only deepen the do-mestic plight of its own citizens. In essence,Britain had become the depository nationfor wandering gold which fled from Ger-many, Austria and Hungary as well as otherEastern European nations. A portion ofthose deposits were lent back to those na-tions in an effort to prevent their collapse.But when confidence was thereby weak-ened in the British ability to cover its out-standing foreign debts owed to depositoryof this frightened "fugitive" international

BRITISH POUND

U.S

. $ P

ER

BR

ITIS

H P

OU

ND

MONTHLY: 1931


4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3


369

capital, it thereby destroyed the pound in itswake.

The huge and sudden swings within theinternational capital flows played havoc onforeign exchange. This did more damage toworld trade than any tariff. Not only wascommerce unsure of what exchange rate atransaction would finally yield, it also hadconcerns about whether or not paymentcould even be appropriated. Those whochose to lay the blame for the contractionin world trade solely on the shoulders of theSmoot-Hawley Tariff Act of 1930 have donea grave injustice to our memories of thisterrible period. No one seems to mentionthe fact that international debt had beenorchestrated in the same manner in whichPonzi had managed his scheme. Paymentsto one were merely appropriated by bor-rowing from another. This was a greatertransfer of wealth from the people into gov-ernment coffers than any taxation schemeever devised. There can be no question asto why capital was far from contented andconfidence proved to be a rare commodityin itself. With bonds becoming worthless

from one nation to another, people becamereluctant to invest their savings in anything,no less foreign bonds. For years the adver-tising had touted that bonds were the "safe"investment. But in the end, more capitaldisappeared through these internationaldefaults than was ever lost on the stockmarket.

There are those who criticized Hoover fornot coming to the aid of Britain. But at thisstage in the game, world confidence was soshaken that it would have been similar tosomeone who was drowning trying to besaved by another who didn’t know how toswim.

In the aftermath of the Depression, oneof the steps to better organize this interna-tional system of payments was the creationof the IMF. The concept would be that theIMF could extend temporary loans to pre-vent such instant overnight pressure againstone particular nation, which would preventthat nation’s subsequent default. Althoughthis new postwar mechanism would help torestore stability up until 1970, it would not


370

change the situation of confidence fleeingfrom one currency to another. Since the1970s, we have seen these very same forcesof confidence lay siege to various curren-cies. Expanding trade deficits, rising fiscaldeficits, and a growing national debt did notprevent the dollar from rising to recordhighs moving into 1985. Reason does notnecessarily follow logic. One cannot man-age an economy based upon these tools thatfailed during the Great Depression andduring every panic in confidence thereafter.

Time magazine reported in its September28, 1931 edition on the shock of the Britishdefault. Their comments were as follows:

"Last Monday, all businessmen wereshocked to read in their morning papersthat the British pound sterling was nolonger based on gold. The Tokyo StockExchange had announced that it would notopen. Tokyo was followed by Bombay, Cal-cutta, Johannesburg, London, Berlin, Am-sterdam, Copenhagen, Vienna, Oslo,Stockholm, Brussels and Athens. The ParisBourse opened, but limited all trades to 5%

of all holdings and no dealing in foreignexchange. Montreal’s Exchange openedsimilarly restricted. The New York StockExchange remained open, but as in darkNovember 1929, short selling was forbid-den. In the artificial market thus created,stocks gyrated unsteadily, closed higher;bonds closed at lows for the year."

There can be no doubt that the shenani-gans of various governments did more harmto international trade than mere tariff re-straints. Tariffs merely upset the balance ofprofit whereas disruption of foreign ex-change injected tremendous risk and un-certainty which destroyed confidence in itswake. The lessons of the Great Depressionare many but they certainly do not end withmere tariffs. Although in the decades thatfollowed this period, several new inven-tions such as the IMF and the GeneralAgreement of Tariffs & Trade (GATT)emerged, governments failed to draw upontheir lessons from foreign exchange ma-nipulat ion. Competit ive devaluationswould become the tool to combat worldtrade in the postwar era.


371

The Dow Jones Industrials dropped moreseverely than ever before, second only tothat infamous collapse into November1929. The industrials fell below the 100level and closed September on the low ofthe month. As October entered, the havoccontinued, forcing the industrials down tonearly 86 which was a far cry from the peakon the "moratorium rally" which was estab-lished during June of 1931 near the 157level. This decline came close to a 42%drop, but the curious thing was that short-selling had actually been banned. Worldexchanges opened and quickly closed assoon as selling pressure resumed. "A massexodus of capital," are the only words thatcan be used to explain the events in thewake of the British default.

It was at this time that sentiment towardshorts began to turn into open attacks whichclearly demonstrated an undertone of ha-tred. With catastrophic losses dealt to stub-born bulls who held onto stocks throughthis decline, cries to outlaw shortselling be-gan to be heard even on the floor of theHouse of Representatives.

In Time magazine we find an excellentarticle which portrays the sentiments thatbegan to develop against the bears duringthis era. This sentiment eventually becamemuch worse, turning into witch hunts on thepart of the Senate throughout the years thatfollowed.

"When Lawyer James Watson Gerard,one-time ( 1913-1917) Ambassador to Ger-many, arrived in Manhattan from Europelast week he was in a critical mood. He saidPresident Hoover should up and say prohi-bition is nonsense. He chided Manhattan’sbankers for paying more attention to Ger-many than to the U.S. He scolded big cor-porations for not giving out intelligible

statements; he and Mrs. Gerard have some2,300 shares of General Electric and hedefied ‘any one to tell from the statementsof this company what it is doing.’ BecauseMr. Gerard has previously been known as afoe of shortselling, no Wall Streeter wassurprised to read that he added: ‘I also feelthat shortselling here should be curbed im-mediately.’

"But this Gerard interview was only aprelude to a week replete with attacks onmethodical bears. A few days later LawyerGerard declaimed that shortselling is ille-gal because it is gambling, is as bad as set-ting fire to property. ‘It is selling somethingwhich the seller has not got and which hehopes to buy at a lower price, that lowerprice being made possible by the mere factof the sale...The result is that the stockwhich the small investor bought on mar-gin...is actually used as a club against him.’

"Although Wall Street has pat answers tothis attitude, it became apparent last weekthat more than pat answers may be neces-sary if anti-bear legislation is to be headedoff. The first attack on bears will probablycome from the New York legislature.Through his business associate, Patrick Sul-livan, Mr. Gerard last year presented a billto make it necessary for a broker to obtainthe written consent of an owner of stockbefore it can be loaned to shorts. The billwas shelved but will be aggressively revivedthis session by Assemblyman Sullivan,nephew of the Timothy Sullivan who spon-sored New York’s famed Sullivan Actagainst concealed weapons.

"Interference with shortselling in NewYork alone might lead to a rapid growth ofsome interior market. But last week’s de-velopment included a resolution againstshortselling passed by the Chicago CityCouncil and given to the Governor’s Reve-


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nue Committee. There was also an accel-eration of agitation in Federal Governmentcircles.

"Leader of the movement seemed to beJames Eli Watson, Republican floorleaderof the Senate, commonly regarded as aspokesman for the Hoover administration.Last week he said: ‘It is the belief of manythat we shall not recover from our presentdepression until transactions of this kind(shortselling) are either prohibited orgreatly curtailed or properly safeguarded...I have no doubt that one or more resolu-tions of this kind will be passed (by Con-gress).’ Since President Hoover last weekwas conferring with many a financial leader,it was fe lt that Senator Watson knewwhereof he spoke.

"Heartily in agreement with Senator Wat-son were Senators of less orthodox views onfinancial matters. Iowa’s Smith WildmanBrookhart exclaimed that he would see toit that interstate transmission of shortsalequotations is prohibited. Apparently he wasunaware that the Stock Exchange’s machin-ery does not include anything which tellswhether a seller of stock owns it or not.

"Other stacks included: A resolution byUnited States Chamber of Commerce’s di-rectors that shortselling be limited to sellerswho deposit a 40% cash margin and showevidence of possessing the rest. This wouldnot materially alter the present situation,for bears must deposit 25% in most houses,present credit credentials before openingan account.

"The Scripps-Howard chainpapers, pro-fessional crusaders, also took up the battle"against bears."

We can see in this article thus far that theattitude toward shortselling was beginning

to come to a head. Ever since the collapsefirst began in the autumn of 1929, resent-ment toward these rumoured groups of all-knowledgeable bears had persisted. Manybrokers and analysts merely added fuel tothe fire when lacking any true explanationfor the market’s decline, turning to the oldcliche that it was being perpetrated by"bear-raiders." This would later prove to beincorrect as investigations failed to estab-lish that any short interest had been pre-sent. No one bothered to look around themat the tremendous lack of confidence andofficial manipulations which existed in themuch broader bond markets of the world.Many of the loudest cries against the bearscame from wounded bulls. Even JamesGerard was a substantial holder of GeneralElectric. Could his resentment towardbears have anything to do with the losses hesuffered in the stock market?

Time magazine went on to comment fur-ther on the events of this period as follows:

"With so much agitation against short-selling it was becoming apparent last weekthat the New York Stock Exchange wouldhave to make some move itself or else runthe risk of very drastic impositions upon it.One fair sized member firm, Pouch & Co.,announced it would no longer lend stocksto bears because, while shortselling helpsnormal markets, it is ‘utterly immoral andunwarranted’ in a crisis. This attitude wasnot, however, officially that of the Ex-change.

"As an opening move in its defense, theStock Exchange last week ordered all mem-bers not to use the phrase ‘bear-raid’ unlessthey could substantiate it. The reason wasclear: When a stock tumbles, perhaps onsome internal development in the com-pany, brokers often say it was because of a‘raid’ and increase the feeling against bears.


373

That the move was a little late seemed im-plied by the lack of differentiation last weekbetween raids and real shortselling whenbears were attacked. A raid is definitelyaimed to depress a stock that will come onthe market if the price can be shoved downa little. A legitimate short sells on values,feels that time and earnings reports willadjust the price downward. The differenceis the same as between an operator and aninvestor."

Today we can pick up any leading newspa-per and read that the market declined onexpectations of higher interest rates or thatgold declined because interest rates wereexpected to rise. On occasion, the very nextday gold will rise sharply and Fed Fundsmay have also moved higher, but then thepress will tout another reason in place oftheir interest rate explanation. The truth ofthe matter is that often moves are createdon purely technical implications which lackany direct influence from interest rates, oil,or whatever. But the press does not gener-ally understand technical moves or cyclicalmoves and always insists upon having somesort of fundamental answer even whennone exists. Thus was the case in point andmuch of the decline was attributed to "bear-raiders" when, in fact, none existed.

Time also continued in presenting theopinions of Professor Irving Fisher as fol-lows:

"Another commentator on the situationlast week was Yale ’s Professor IrvingFisher. Said he: ‘My former master in eco-nomics, President (Ar thur Twin ing)Hadley, put it well when he said that specu-lation of any kind...is beneficial when itmerely anticipates a rise or fall of prices.’For it then mitigates the rise or fall. It isinjurious when it manipulates prices againstthe natural tendency. Manipulation is usu-

ally impossible when the supply is large andthere is not much overextension of marginbuying. Today, however, shortselling...iscapable of extreme abuse.’ The goated Pro-fessor also made this acute distinction be-twe e n longbuying and sho r t se ll ing;‘Borrowed money comes out of an almostinfinite reservoir, whereas borrowed stockmay come from a very small reservoir...It ispractically impossible for speculators tomanipulate the value of money.’"

Fisher pointed out that long positionscould draw upon a vast reservoir of capitalto borrow for the purpose of buying stockon margin. However, in his contention thatshorts might be able to manipulate becausethe supply of stock is infinitely smaller,something is lost in the logic here. Onecould surmise that shorts could theoreti-cally borrow enough stock to force the mar-ket down. But when a short borrows stock,he then sells it to another buyer. At alltimes there are two longs for each short.The first is the original owner from whomthe short borrowed the stock, and the sec-ond long is the buyer to whom the short sellshis position. In order for the short to sell hecan only do so if there is a buyer. Becausethe reservoir of stock is limited, it becomesactually more difficult for shorts to manipu-late a market. This can be proven by merelylooking at the casualty list of short playersduring the bull market era up into 1929. Theshorts merely fed the market higher, creat-ing in the climax three buyers for the samestock. When the short is squeezed and isforced to cover his position, he becomes thethird buyer. The argument that longs can-not manipulate a market because the sup-p ly o f m o n e y is t o o vast a n d t h u suncontrollable is ridiculous. The evidencethat did come out of the Senate investiga-tions in later years proved the existence ofnumerous "bull-pools" but not the existence


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of "bear-pools" and that manipulation wasevident throughout the bull market.

All the arguments that bear raids were thecause of the market’s demise and that inturn the demise of the market created theDepression are without any foundationwhatsoever. Time went on in this article asfollows:

"So far during the Depression the StockExchange has moved against bears by theQuestionnaire and the complete ban onshortsales which was imposed for two dayswhen Great Britain suspended gold pay-ments. The Questionnaire was used in theautumn of 1929 to learn the extent andpersonnel of the ‘bear party.’ PresidentRichard Whitney (of NYSE) later revealedthe short interest was at no time large dur-ing the days of great breaks. It was usedagain last May and members who were tooaggressive in their tactics received sharpcallings down. The Questionnaire in effectlast week revealed every bear, whether hewas short 10 shares or 10,000 for one houror one month. It placed the Exchange in a

position to act if it wished to, but did notdeter ‘gentlemen’s agreement’ to refrainfrom taking short positions."

The efforts spent against the bears werepurely a waste of time. The exchange’s ownreporting failed to turn up any evidence ofthe almighty bear raiders who knew per-fectly when to sell the market in September1929. Indeed, the sentiment against short-selling was prevalent worldwide. Instead ofgovernments accepting any blame for thesad state of the international economy, theyturned against the free market forces inmany varied ways but always with the sameultimate goal. Time reported on this aspectin this article as well.

"In few nations nowadays is there a ‘freeand open market.’ The Berlin Bourseclosed from July 13 to September 3, openedwith shortselling banned, then closed again.In Great Britain all trades were put on acash basis which practically eliminatedshortselling as did restrictions imposed onthe French and Athenian Bourses. On theParis Bourse a seller must deposit 40%


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margin, also 25% on the amount of thestock sold which makes bear activities a richman’s privilege. One of the most dramaticevents of the present crisis occurred in Am-sterdam on September 21 when after a ter-rific slump in prices, all transactions werecancelled, the Exchange closed in statusquo. Montreal and Toronto met the Britishcrisis by banning shortsales and establishing’minimum prices’ for securities, but bothlast week were open with no restrictions.The Tokyo Exchange has been closing andopening repeatedly during recent weeks.Tokyo stocks broke badly when the sharesowned by interests who operate the Ex-change collapsed.

Can you imagine that after a market col-lapses in sheer panic that an exchangewould then declare all the trades null andvoid? That is precisely what happened inAmsterdam during September. Unfairlaws and rules against the free markets wereuniversal. The more governments impro-vised such actions, the greater the fearsbegan to spread resulting in a lack of confi-dence which only the financial gods couldchart. Despite all these numerous govern-ment interventions, the free market contin-ued to decline for nearly a year beyond thispoint. Those who were outraged andbrought suit against the Commodity Ex-change in New York for raising the marginsto go long in silver back in 1980 when theshorts held a distinct advantage could havesuffered a worse fate. The exchange mighthave declared all trading for the previousyear null and void and rolled silver back to$5 an ounce by law!

This was not the first time that shortsellingwas blamed for causing a depression. Theissue of whether or not shortselling wasillegal came to a head following the panicof 1903. Action was brought against theexchange in court, which sought to ban

shortselling by charging that it was illegal tosell something that one did not have as if itwere committing a fraud. The case rose tothe U.S. Supreme Court from where theopinion was handed down in 1905 by thefamous Oliver Wendall Holmes who said:"People will endeavor to forecast the futureand to make agreements according to theirprophecy. Speculation of this kind by com-petent men is the self-adjustment of societyto the probable...This court has upheldsales of stock for future delivery."

Despite the fact that the Supreme Courthad upheld the legality of shortselling backin 1905 the growing sentiment was clearlyseeking a scapegoat, and many in govern-ment preferred to point the finger at thosesupposed bears than at the real problemswhich had been created by the numerousbank failures and governmental defaults.

Richard Whitney, President of the NewYork Stock Exchange, had even become thetarget of personal attacks by several Sena-tors. Whitney was working hard to gatheras much information about shortselling aspossible to ward off this attack by govern-ment. He went to Hartford, Connecticut,to speak before the Chamber of Commerceand the audience was packed. Whitney re-vealed for the first time in October 1931 the"short-interest" which had taken an exten-sive amount of time and effort to gathertogether.

On May 25, 1931, the short interest stoodat 5,589,000 shares. He illustrated that itdeclined sharply during the "moratorium"rally and then rose back to 4,480,000 shareson September 11, and declined to 4,241,000on September 18. Whitney illustrated thatat its peak in May, short interest was only4% of the 1,305,516,000 shares listed on theexchange. Of the accounts that hold longpositions on the same date, a total of 59


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million shares were held, which demon-strated that long positions outnumberedshort positions by better than 10.5 to one.

The New York Stock Exchange had for-bidden shortselling for two days followingthe British default and he explained why theexchange lifted this restriction so quickly.The market rallied instead of declining be-cause the shorts covered positions fearingthe restrictions. Within two days, the shortinterest declined from 4,241,000 shares to1,079,000 shares. This, Whitney pointedout, left a great danger. If everyone waslong and prices continued to decline, thenlacking short-covering, there might be littleincentive to be a buyer which could causedevastating declines.

Insofar as the threat that this interest wastightly held among the rumoured "bear-raiders," Whitney produced the accountingwhich illustrated that the short interest hadbeen widely dispersed among 9,369 ac-counts with an average of only 400 shares.Despite this evidence, government was notsatisfied and the Senate hearings would stillbe convened, turning into the most seriousinfraction of constitutional rights ever insti-gated against the public as a whole. Every-one would soon learn that the power of theGrand Jury does not need probable causeto investigate; all it needs is official curios-ity.

The commodity exchanges were far fromfree of these interventions either, as re-ported by Time magazine in this same Oc-tober 12, 1931 article.

"Restrictions exist in two important U.S.commodity markets. The New York Cot-ton Exchange does not permit a fluctuationof more than 200 points per unit (100 bales)in any one day. Since 1925 no single futuresaccount on the Chicago Board of Trade may

exceed 5,000,000 bushels at any one time,either long or short. This is a ‘workingagreement’ with the U.S. Grain FuturesAdministration and is strictly enforced, al-though it does not apply to bona fide hedg-ing. Thus, over-extension of a trader on ascale which would hurt all other traders isalmost impossible."

In commodities, shorts are not limited bya definitive reservoir of stock. Contractscan totally outnumber the supply of anygiven commodity. But the commodity in-dustry was besieged by the criticism whichfollowed the panic of 1919. There interestwas clearly focused within the commoditysectors as well as speculation. The rallieswhich any commodities had undergone


377

overshadowed the stock market as if thecommodities were King Kong and stockswere represented by Flipper, the dolphin.This in part led to many restraints on thecommodity markets including the imposi-tion of trading limits on the amount a com-modity could move during the course of aday as well as position limits. Those arerules which commodity traders deal withevery day in this modern age. They are notquestioned because to today’s trader theyhave always been there. But, in fact, theywere the intervention which followed thepanic of 1919 when commodities had heldthe center stage. For this reason, commodi-ties had declined in favour of the unre-stricted stock market during the roaring’20s.

But it was also these restrictions in com-modities which tended to bring about a lackof speculative interest in the futures mar-kets. Without that interest, commoditiessuffered from stagnation. This has also ledmany to contend that because commoditiesdeclined by and large during the 1920s, thatinflation was nonexistent and they alwayspoint to the 1920s and the "Nifty-Fifties" insupport of their argument. As we continuethrough this study of the free markets andanalysis, we will see how this assumption isalso completely without foundation.

But unlike the illusive bears, the invest-ment trusts did exist and published quar-terly statements to verify that indeed theywere still around. One of the first trusts topublish a report at this time was the Tri-Continental Corp., and a sister trust whichit also controlled named Selected Indus-tries, Inc. The Tri- Continental Corp. state-ment for September 30, 1931 showed amarket value of its holdings of $29 millioncompared to $51 million for the year prior.The book value of the common stock haddeclined on a per share basis from $8.70 to

$2.84. The listing of stocks sold by those twotrusts began to illustrate who perhaps thereal big sellers were. This one trust hadsold off 16,100 shares of G.M., 3,700 sharesof U.S. Steel, 14,724 shares of Studebakerand 45,400 shares of the Chesapeake &Ohio Railroad just to mention a few. Theirstatements reflected that most of their for-eign bond holdings had been concentratedin German issues, but they were at leastfortunate enough to have sold off much ofthis position during the first quarter of 1931.But their statements had also reflected ashift in assets which many other trusts hadalso closely paralleled. This was the out-right selling of common shares of stock infavour of preferred shares as well as bondissues. This trend among the investmenttrusts is the reason why even though stockprices had declined, the NUMBER of shareholders of the top blue-chip companiescontinued to rise and actually peaked dur-ing 1932. It was the investment trusts whichhad bought much of the stock in 1929 and itwas the individuals who bought stock fromthem on the way down.

The sharp decline in stock prices duringSeptember of 1931 was also accompaniedby a sharp decline in production withinmany industries. On the surface one couldperhaps argue that stock prices had fallenbadly due to large shortselling, but in real-ity, one could not blame the sharpest de-cline in productivity upon supposed shortsin the stock market.

Auto production during September fell25.6% from August levels and 37.7% fromSeptember 1930 levels according to the fig-ures released by the National automobileChamber of Commerce. Steel productionfell to only 28.2% of capacity, a level whichpenetrated the lowest on record as far backas 1921.


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The numerous banking statements whicharrived at this time were of major interestto many. The trend toward withdrawals hadclearly shown up, and to everyone’s surpriseeven the largest bank, the Chase National,was not spared. Chase posted a decline indeposits of $214 million during the thirdquarter. The Philadelphia banks were indeep trouble, perhaps best illustrated bylarge advertisements which were preparedby prominent citizens within the commu-nity. These advertisements were pleadingwith the public not to withdraw their capitalfrom the banks in town. The largest was thePhiladelphia National Bank whose depositsdeclined $83 million during the third quar-ter of 1931, falling to $289 million.

It cannot be denied that the supply ofmoney contracted during this period. If allbanks reported a decline in deposits, obvi-ously the money had to go somewhere.There are those who blamed the FederalReserve for failing to expand the moneysupply during this period which caused thecontraction and thereby the Depression.But again this argument is merely superfi-

cial. The causes and effects were notmerely domestic, but also international.Watching the ups and downs of the supplyof money in the U.S. cannot lead us to theultimate cause for the Depression of theworld. Besides, this argument ignores in-ternational circumstances and capital flowsof international funds which fled from onenation to another as sovereign defaultssparked deep fears, and it ignores the issueof what money is and how it is created.

As in the example that I just provided toillustrate why a short cannot control andultimately manipulate a stock on sheernumbers, money supply works in the samemanner. In commodities, the number ofcontracts are not limited to any physicalamount of goods available. Thus the shortneed not borrow 100 ounces of gold toadopt a short position. Therefore, longsand shorts always balance and neither sidecan actually outnumber the other. In stocksas in money, the short needs to physicallyborrow the stock and therefore since stockis of a definitive limited quantity, when theshort borrows the stock from an original


379

owner and sells it to another, he has createdtwo persons who both "believe" that theyown a share of that company.

Imagine now that we are talking aboutGeneral Motors which issued 1,000 shares.For argument’s sake, let us say that a verybearish person borrows 1,000 shares anddecides he wants to go short. He borrowsfrom person A and sells it to person B. Thebroker who does the accounting for thesethree people will send them all a statementat the end of the day’s transactions. PersonA will show that he still holds his original1,000 shares. B will show that he has justbought 1,000 shares and the short will showa statement that he owes 1,000 shares. Inreality 2,000 shares are now thought to beowned by both A and B. Both A and Bdecide that they want to buy stock in U.S.Steel. The broker will lend them 50%against the fully paid positions in G.M. Noweach can borrow against the combined2,000 shares they own of G.M. and they buyU.S. Steel. But G.M. never issued 2,000shares; all it ever issued was 1,000 shares of

G.M. stock without the company havinganything to do with it.

The creation of money works in the samemanner. A vast amount of money was cre-ated by the booming stock market. Let usconsider that A and B bought their G.M.stock at $40 and then they borrowed 50%and bought U.S. Steel for $20. After threemonths, let us suppose that G.M. rose to$100 and U.S. Steel moved up to $60. Nowthey decide that they want to borrow againand buy Sears which is selling for $60.

Against G.M. they borrowed $20 and nowit is worth $100. The broker will thereforelend them another $30 against the G.M.shares. U.S. Steel they own outright andthey borrow $30 against that. They nowtake the $60 and buy Sears. The value ofthose assets continues to move higher. Thelimit is not imposed by the outstandingmoney supply but by what someone is will-ing to pay for it. If we were to add up all thestock on the various U.S. markets, bankdeposits, bonds, diamonds, real estate, etc.,we would find that the intrinsic value placed

US Velocity Rate of Money Supply

annu

al %

rat

e of

cha

nge

Annual Rate of Change (GNP/M1)=Velocity

1921 1923 1925 1927 1929 1931 1933

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

-1.00%

-2.00%

-3.00%

-4.00%

-5.00%

-6.00%

-7.00%


380

by man on all these assets far exceeds theoutstanding money supply. In fact, the totalvalue of real estate in the United Statesexceeds the entire world supply of money.This quasi money in tangible form cannotbe controlled by the Fed, no less counted.Its value rests solely upon the whims ofconfident and contented capital. Whencapital becomes less than confident andreal estate suddenly becomes nonliquid,values plummet because the supply of thesethings vastly outnumber the actual supply ofmoney used for exchange. Hence severeand rapid contractions always follow rap-idly expanding inflationary periods. Thosewho wish to assert that the roaring ’20s werea period of low inflation are insane. Infla-tion may not have been present in raw com-modities, but insofar as stocks and luxuryitems were concerned, inflation was ram-pant as evidenced by the Florida land boomand the bull market itself. People were notstanding in line, hoarding toilet paper orsugar as they were in the 1970s, but theywere bidding up the price of housing,stocks, bonds, diamonds, furs and automo-biles. This was a period of inflation in tan-gible forms of wealth, which in realitycaused a great expansion in this tangiblemoney supply that was just as good as goldand could be placed as collateral at a bankfor borrowing purposes.

We read earlier that $1 in gold led to $13in credit according to the Fed’s own esti-mates during the 1920s. Of course this vastmultiplication of credit has been somewhatreduced in modern times since banks arerequired to maintain higher levels of re-serves. But still what becomes important isnot so much the contraction by the Fed butthe velocity rate at which money changeshands. When people lose confidence in abank or the government and they hoardtheir assets, as was the case during the De-pression, the hoarding of gold reduced the

multiplication factor of credit. Since theFed could not create gold, its only optionwas to create paper money. That it couldnot do at a rate of 13 times in good con-science while on a gold standard. Such amove would revive Gresham’s law of badmoney driving out the good and the endresult would have been another hyperinfla-tion as was seen in Germany during theearly 1920s. Even so, it was not the lack ofmoney or the contraction so much whichdisrupted the economy as it was the sharpdecline in velocity.

The private sector has always been incontrol of its money supply to a large extent.Governments merely aggravates the situ-ation by playing games. For example, theUnited States borrows money through issu-ing bonds, bills and notes. It is somehowbelieved that if government borrows tocover its debt rather than monetize itthrough issuing paper money that the ef-fects will not be as inflationary. The Na-tional Debt stood at $16.9 billion in 1929and rose to $22.5 billion by 1933; by 1976it reached $620.4 billion. If we look atmoney supply through the strictest meas-urement M1 (currency plus demand depos-its), we find that it stood at $26.5 billion in1929, $19.5 billion in 1933 and $311.9 bil-lion in 1976. In 1929 the amount of out-standing U.S. securities was considerablyless than the outstanding currency and de-mand deposits but by 1933 debt exceededM1 by about 15%. By 1976 outstandingdebt was almost twice M1.

If everyone wanted to cash in their U.S.bonds, notes and bills at the same time,government would be forced to printmoney since not enough cash as measuredthrough M1 exists to cover all the debt ob-ligations. This is exactly what takes placethrough private investments such as stocks,real estate, antiques, fine art, diamonds, etc.


381

As long as people feel comfortable in view-ing these things as a "store of wealth" every-thing is fine. But when confidence is lost,everyone runs in the direction of cash.There is simply not enough cash to goaround and a massive contraction takesplace. Therefore, the Great Depressionwas not only a massive contraction in thevalue of these tangible assets, but it was alsoa contraction in debt instruments as well.When nations began to default on theirbonds, confidence in their paper moneygave way as well, driving the whole worldinto gold and the dollar.

Debt has always been a huge problem toman. Because debt multiplies the value ofthese tangible assets, it creates a bubble ofunprecedented danger which eventuallycomes to a head creating a stampede intocash.

Debt has always been a problem that hasinflicted every society known to man. Eventhe great Julius Caesar was forced to dealwith such financial decisions and, indeed, it

may have been these decisions whichprompted his assassination. Much of thepolitical structure of Rome was built onlavish extravaganzas on the part of politi-cians to gain favour and thus votes from thepeople. To cover such costs, one wouldborrow vast sums to pay for public gamesand events. The rates of interest were oftendriven to well over 100% and indeed a debtcrisis had besieged Rome during the periodof the Civil War. It was widely believed thatCaesar would be forced to declare all debtsnull and void to secure his position. EvenMarc Anthony had bought up the auctionedproperty of several political exiles, includ-ing the very palace and slaves of Pompey theGreat, in the belief that such debts wouldbe wiped out by Caesar. But no matter howpopular such a move would have been tosuch exploiters of the circumstances, Cae-sar cancelled all interest which had beenaccrued on debts during the Civil War or atleast for a two-year period upon his returnto Rome in September of 47 BC. Had henot taken such action the debt- ridden soci-

U.S. National Debt in Comparsion to M1

Raw Data Source: U.S. Balance of Paymnt

expr

esse

d in

per

cent

age

(Debt-M1)/M1 1929 - 1976

1929 1934 1939 1944 1949 1954 1959 1964 1969 1974

200.00%

180.00%

160.00%

140.00%

120.00%

100.00%

80.00%

60.00%

40.00%

20.00%

0.00%

-20.00%

-40.00%


382

ety would have created a civil war on thestreets of Rome.

Today we question little about debt. Weseem to accept that interest is a just thingwhich is owed to the man who holds themoney. But in fact, philosophically, civili-zation had turned its back on debt and in-terest after it had been proven to havedestroyed numerous societies throughouthistory. To charge interest was a sin of usuryin both the Catholic Church as well as in theArab religions. Only the Jews did not con-sider charging interest to be a sin. Through-out the Middle Ages, no Christian couldcharge interest to another. If he lent moneyto someone, it was considered to be a Chris-tian act and to demand interest which mightforce that individual to repay two or threetimes what he had originally borrowed wasa sin in that one merely exploited the mis-fortunes of others.

The Jews played a large part in the devel-opment of trade, for it was the Jews wholent money for business ventures and fi-nanced voyages. But the Jews were alsomoneylenders who debtors could not repay,and this often led to the excuse which mostcalled anti-Semitism. Much of the killing ofJews had nothing to do with religion, butinstead it was caused by the fact that theyheld the mortgages on much of the prop-erty. Things became so bad that the Popethreatened excommunication against any-one who harmed the Jews.

It was this same law of usury which even-tually led to the breakup of the CatholicChurch into various Christian sects. Chris-tians wanted to be able to lend money andthe Pope would not lift the law of usury.Thus a revolution in religion took place andthe various Christian sects made it permis-sible to charge interest. However, they dis-guised many of their motives by calling the

Pope the "Anti-Christ" because he sought toprotect the Jews and because he sought tocontrol debtors by maintaining the old lawsof usury, thereby loosely fitting together afew lines of the Revelations which foretoldof the coming of the Anti-Christ.

The world has therefore gone through thelong-term cycle of debt several times. It wasdestroyed by massive overextension, thenabandoned debt and interest payments andthen reverted toward this system. We nowlive in a world highly involved in debt andinterdependent payments both on a privateas well as governmental level. The contrac-tion in world trade was damaged far moreby the default on foreign bonds, the flightof capital from one nation to another andthe massive contraction in the value of bothdebt instruments and tangible assets thanby any other forces during the period.

Little work if any has ever been devotedto studying the differences between a soci-ety based upon debt and one void of suchinstruments. Few economists are evenaware that civilization has alternated be-tween these two extremes throughout his-tory. Consequently, few opinions as to thecauses of the Great Depression have evenfocused on this very important aspect.

In actuality, most analytical commentaryon the Great Depression has ignored theimpact of debt and the soveriegn defaultson numerous government bond issues, in-cluding municipal issues within the UnitedStates. The sheer fact that confidence fledfrom the bond markets is evidenced by thefact that bonds declined even during 1931,peaked in February, declined in June, ral-lied in sympathy with stocks during themoratorium rally and then continued lowerinto year end. The discount rate cut to thehistoric low of 1.5% by the Fed in May of1931 failed to create a reversal in the trend.


383

Bonds declined despite whatever the yieldwas. Such market action moving in directopposition to what we would normally ex-pect today is highly contradictory to whatwould be normally anticipated. Such a di-vergence could only be sparked by a com-plete collapse in confidence.

Governments were literally confused bythe events that surrounded them. They didnot understand how to restore confidencein their currencies or to dispel rumourswhich would shift vast hoards of capitalfrom one nation to another. Although theUnited States became the object of affec-tion for this refugee international capitalimmediately following the British default inSeptember 1931, rumours soon sparkedfears that it would be the United States thatwould fall victim to the turmoil of the eraand capital began to flee from the UnitedStates. This disrupted the domestic econ-omy insofar as the Fed’s actions to try torestore confidence in the dollar were nodifferent than those attempted by Ger-many, Austria and even Britain. The Fedraised the discount rate substantially, trying

the typical textbook play, thinking thathigher interest rates would attract the refu-gee capital once again.

The Fed turned to its textbook tactics andraised the discount rate from 1.5% to 2.5%in October of 1931. This rise in U.S. inter-est rates was not sufficient to convince any-one that the U.S. would not abandon thegold standard which thereby equaled a de-fault on its foreign obligations. Still failingto see that it was not how much one wouldpay but whether or not one would even getpaid, the Fed raised the discount rate againthat very same month to 3.5%. But still thisdid nothing to dispel the sudden lack inconfidence which had developed.

We find the commentary in Time maga-zine on October 26, 1931, as very helpful ingiving us a feeling of what was taking placeat the time.

"RATE UPPING"

"With gold flowing swiftly out of its vaults,last week Federal Reserve Bank of New


384

York raised its rediscount rate to 3.5%, a1% advance from the rate which prevailedfrom May 8 to October 9. Through lossesof gold to foreign countries and to U.S.hoarders, the Federal Reserve Systemshowed last week a 61.8% ratio of gold ondeposit and notes outstanding against67.1% the week before, 78.4% before Eng-land suspended gold payments September21. Legal minimum is 40%. In four weeksthe U.S. lost $649,000,000 in gold, largestmonthly drain on record. Previous recordwas a loss of $99,300,000 in June 1928. Lastsummer when Germany and England weree xp e r ie n cin g l ike m o ve m e n t s, t h eReichsbank lost $247,000,000 in sevenweeks, the Bank of England $779,000,000in a fortnight. If last week’s rate of declinein the Reserve Ratio were maintained, thelegal limit of 40% would be reached in thenext four weeks. Were the celegal mini-mum exceeded there would be a currencypanic, even perhaps suspension of gold pay-ments."

We can see as reported by Time that thedrain was of historic proportions. There isno doubt that capital flows between nationswere never greater. In the midst of all thisturmoil the casualty was certainly worldtrade. Beyond tariffs, now internationalpayments were cast in doubt. Tensionswere only heightened when in mid-OctoberCanada prohibited the exportation of goldexcept under valid license in payment forforeign trade. This helped take the specu-lative sting out of the Canadian dollar whichhad dropped to a discount with that of theU.S. But in all, the Canadian move wasperhaps the smartest government actiontaken in the midst of this chaos for it simplyeliminated the speculative withdrawal ofgold but earmarked gold exports for legiti-mate trade circumstances only. This was incontrast to Britain and the United Stateswhich attempted to entice foreign capital to

remain by raising interest rates. Thesewere measures which failed to stem thepanic and only further disrupted their do-mestic economies by forcing industry tosuddenly bear the brunt of a sharp 125%rise in interest rates within one month with-out notice of any kind.

Even Hoover wrote in his memoirs: "TheBank of England tried to stop the run andattract capital - and thus gold to Britain - bythe usual device of raising interest rates.That device does not work in times of fear,and in this instance had little effect exceptto spread more fear." Hoover went on totalk about the effects of the gold panic with-drawals from the United States and howthey se r iously d isrupted U .S. t rade .Hoover wrote:

"At this time foreigners concluded thatthe United States would be the next bul-wark of international stability to collapse.They began to withdraw their deposits fromour banks in gold. By the end of Octoberwe were to lose about $700,000,000 fromour gold supply. This cramped our volumeof credit and increased our bank demandson their borrowers. To add to our troubles,domestic hoarding of gold and currency byour citizens began. Our exports to theworld dropped to about one third of the1929 rate. Worse still, our exports of prin-cipal farm products to Europe had nowdropped to almost zero, further demoraliz-ing commodity prices. Our unemploymentswelled."

From the time when the European panicsfirst began in April, the Federal Reserveindexes illustrated marked declines. By theend of September, the Fed’s index on indus-trial production declined 18%, factory pay-rolls 20%, construction contracts were off30% and common stocks had taken a 40%decline. Clearly fears over international


385

defaults can take their toll very quickly.Today we are not immune to such distur-bances and we have experienced sharpcapital flows into the U.S. dollar whichcame in spite of what traditional economicswould lead us to believe. Confidence playsa very key role in international finance. Itcan overpower all logic and when shaken itspawns nothing but rumour and fear.

Again we find that the government tookaction which was adverse to its own domes-tic economic condition by raising the dis-count rate in favour of internationalcircumstances.

Hoover once again rose to the occasionwith ideas that were provocative and in re-ality not far from the philosophy of JohnMaynard Keynes, which was adopted dur-ing the aftermath of the Great Depression.Hoover’s idea was dubbed by the press ashis "Super Plan" aimed at the turmoil cre-ated by the nonliquidity caused by numer-ous banking failures.

The withdrawal of gold from U.S. bankson the part of foreign depositors and centralbanks caused several serious side effectswithin the domestic U.S. economy. Banksresponded to the domestic urge to with-draw and hoard gold in a manner which wasfar from beneficial to businessmen andfarmers as well as owners of mortgaged realestate. The bankers saw the turmoil as athreat, particularly against their liquidity,which in turn threatened the very survivalof the banks. As a result, bankers were ledto look out for number one, themselves.They began to call in loans from many sec-tors, trying to increase their cash reserves.Many homes and farms were forced intoforeclosure, which merely added to theemotional depression that existed at thetime.

Bankruptcies were increased as creditorscalled in all the markers of debtors. Thecontract ion in the money supply wasthereby not caused by the Federal Reserveintentionally, but in contrast by the with-drawal of foreign capital, domestic hoard-ing, and the needless foreclosure onproperty which further depressed the val-ues of tangible assets.

Hoover’s "Super Plan" was actually theformation of what was known as the Na-tional Credit Corporation. Numerousbanks had been closed, tying up assets in thebillions of dollars. Depositors’ money,which had been lent on real estate, for ex-ample, was frozen when the banks wereunable to collect enough from the repay-ment on loans to satisfy demands from itsdepositors. Thus, the value of real estatedropped substantially, disarming the multi-plication effects which had originally con-tributed to the expansion in money supply.

O riginally, the man who deposited$10,000 allowed the bank to lend that$10,000 to someone who wanted to buy anew home. The $10,000 was thereby paidto the builder, creating $20,000 in depositsthroughout the banking system. But nowthe game of musical chairs came to a halt.Unable to sell the real estate to recapturethe original $10,000 it had taken from thedepositor, the reality of the game had hithome. The $10,000 no longer existed be-cause it had been paid to the builder whodeposited the money somewhere else. Aseveryone clamored for their money, thesedeposits simply vanished and the moneysupply contracted in its wake.

Hoover realized that vast sums of assetswere frozen by this process and that, com-bined with international withdrawals,spelled potential national disaster. His ideawas to create another form of central bank


386

in a sense. The National Credit Corp.would be a private organization funded by$500 million in deposit contributions fromthe banks themselves. In turn, these fundswould be used to bail out banks with cashflow problems by lending them cash upongood collateral hold on their books. This heviewed was essential to bring a halt to thebank failures and the foreclosures whichfurther increased fears among the peopleand led to domestic hoarding of gold. Thiswas a huge vicious circle which in the endadded pressure on still other banks andcontracted the money supply even further.The tangible assets far outnumbered thenet cash available and as the velocity ofmoney declined, so did the deposits and themultiplication factor within the bankingsystem. This circle of events had to bestopped and this was Hoover’s brilliant "Su-per Plan" to get the job done.

Hoover’s plan actually began prior to theBritish default of September 21, 1931. Itwas at a confidential meeting during earlySeptember that Hoover called to the WhiteHouse the entire Advisory Council of theFederal Reserve Board members, whichconsisted of 24 bankers and Treasury offi-cials. Hoover proposed that the banksshould pool together $500 million for thecreation of this new project and that in ad-dition, this pool should be given borrowingpowers of $1 billion. The men in atten-dance seemed to support the idea and ten-tatively agreed to begin organizing banksaround the nation.

In many ways this was quite similar to theFederal Reserve, which had been born outof the turmoil largely created by the panicof 1907. The Federal Reserve would notaccept mortgages or industrial notes as col-lateral from banks as part of their reserverequirements. Thus, this new concept

would accept collateral which the Fed didnot.

Then the British default took place. Sud-denly the gold reserves of the nation wereunder siege. Eleven days later, Hoovercalled a special meeting of the leading menfrom the banks, insurance, and loan agen-cies along with several top government of-ficials. Hoover wanted to avoid publicityon this meeting, fearing that speculation bythe press might adversely affect his planswhile the matter was still in the planningstages. The meeting took place on October4, at the home of Andrew Mellon ratherthan at the White House. This move wassuccessful in avoiding the attention of thepress who keenly noted the comings andgoings at the White House.

Hoover also made plans which placed himin the position to call for a special sessionof Congress on October 6 just in case theprivate leaders refused to go along with hisproposal. Hoover wrote that many in atten-dance at this meeting held at Mellon’shouse did not want to contribute funds tothis central pool and urged that the govern-ment should put up the money. ButHoover’s ideas were strongly against usingtaxpayer’s money, and he believed that theprivate sector should participate in trying tosave itself collectively. But he also realizedthat Congress would frown upon such gov-ernment aid even more so than he. Al-though H oover later wrote that th ismeeting at times became quite heated, itended with the bankers agreeing to call ameeting of all major New York banks forthe following day.

The insurance and loan agencies were farfrom cooperative. Hoover had proposedthat they should hold back on foreclosuresand that a central system of discountingmortgages should be established. Again,


387

the concept was a central bank which wouldaccept mortgages in the same manner as theFed accepts cash or liquid notes. The insur-ance companies were not in the position ofbanks and they did not have the fear ofpublic runs to withdraw deposits. There-fore, the insurance industry had no incen-tive and regarded foreclosures as simply abusiness decision which should not concernitself with the personal affliction that itmight cause. The loan agencies were al-ready charging much higher rates thanbanks and they too displayed a more self-centered approach. Only the savings banksand savings and loans were receptive.Hoover wrote in his memoirs: "I returnedto the White House after midnight moredepressed than ever before."

Hoover then met with Congressionalleaders at the White House on October 6.He found them unwilling to fund any gov-ernment structure to provide stability forthe real estate situation. The next day,Hoover met again with the insurance, loanagencies and the savings and loan indus-tries. The savings and loan group agreedwith Hoover’s proposals which called for animmediate end to foreclosures upon re-sponsible people. The insurance industryrefused to go along with the proposed bank-ing structure which would have 12 districtsand accept mortgages as deposits in thesame manner as the Federal Reserveworked among its member banks. The in-surance industry objected on the groundsthat it would "create lower interest ratesand thereby the income to their policyhold-ers would be reduced." Hoover tried topoint out that in many cases their preciouspolicyholders were the very same peoplewho were losing their homes in foreclosure.But the insurance companies would not co-operate.

Hoover then was forced to reduce thescope of his idea, creating the Home LoanBanks which stood in the middle of thesavings and loans and had acceptedHoover’s ideas as quite brilliant. The struc-ture would set up 12 districts in the samemanner as the Federal Reserve.

News of these new plans were acceptedquite favourably by the marketplace and forone brief shining moment restored confi-dence both domestically and internation-a l ly. Bu t a t f i r st , t h e E u r o p e an smisunderstood these proposals and as-sumed that they would be funded by gov-ernment, which in that light meant inflationand a decline in the U.S. gold reserves.Therefore, initially, this news added somepressure to the dollar coming from Europe.Eventually, these fears that the UnitedStates would go into default began to sub-side along with the gold withdrawals goinginto year end. The concept of this new formof centralized private banking to unlockfrozen capital and to help prevent furtherbanking failures was welcome news to themarkets as well.

The following table illustrates the U.S.gold situation and the ratio to currency as itdeveloped throughout this immediate crisisperiod. Column (1) provides the U.S. goldreserves expressed in millions of dollars.Column (2) provides the ratio of gold re-serves to Federal Reserve notes and depos-its, while column (3) provides the actualFederal Reserve notes in circulation. An-other point that should be made is that theonly important nations which remained onthe gold standard were the U .S. andFrance, and as of the week ending Novem-ber 18, 1931, the U.S. held $2.8 billion ingold while France held $2.6 billion.

U.S. Gold Reserves & Currencies Ratios


388

Week Ended Gold Res Ratio Currency

Sept 10 3,485 74.9% 2,005

Sept 23 3,327 73.4% 2,045

Sept 30 3,138 73.4% 2,097

Oct 7 3,036 63.8% 2,269

Oct 14 2,836 58.5% 2,321

Oct 21 2,764 56.5% 2,383

Oct 28 2,738 56.6% 2,383

Nov 4 2,772 58.1% 2,447

Nov 11 2,826 62.4% 2,449

Nov 18 2,874 64.1% 2,433Year Ago 3,040 81.9% 1,383

*Source: Time Magazine

The European fears which developedover the misunderstanding of Hoover’s Na-tional Credit Corp. had their way of spark-ing a rise in commodity prices in terms ofdollars. This was only natural since theyfeared the dollar’s decline and the U.S. po-tential abandonment of the gold standard.This spelled one thing: a sudden price shockof inflationary involvement. The U.S. presswas a bit confused at the sudden foreignbuying of commodities. Many attributedthis to unwarranted fears that perhaps the

U.S. might institute tariffs on raw com-modities, while others claimed that it wasfears that Britain would impose a tariff.The European press centered on the fear ofU.S. abandoning the gold standard. Addedto these rumours, others circulated thatbuying was caused by the fact that Russiawould no longer be an exporter of wheat.None of these rumours proved to be trueand in the end, when Europe realized thatHoover’s plan was not a license to inflate,commodity prices declined with the dollar’ssudden rise. But this was a lesson whichothers would point to in the years ahead asevidence that currency inflation was theonly way out of this mess.

In the November 2, 1931 edition of Timemagazine, we find a short but descriptiveaccount of the commodity rally which be-gan during October. It was a strong techni-cal reaction which began to lead towardmuch bullishness.

"On October 5, the price of May wheatwas 48.25 cent s a bushel. Last week it rose

Dow Jones Industrials

Source: Dow Jones

Daily Activity Sept - Dec 1931

Sep Oct Nov Dec

150

140

130

120

110

100

90

80

70

60

50


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to 61.25 cents. Bullish factors were a re-ported 16% decrease in winter wheat acre-age; the return of several bull operators tothe pit after a long absence; heavy buyingfrom England in anticipation of a tariff;covering of short positions and long-buyingfrom foreign interests who were heavilyshort around the lows. Cotton advancedslowly, steadily. Factors were a Septemberrate of consumption better then that of lastyear, re-opening of many Lancashire millsafter the pound’s fall, also British buyingagainst a possible tariff. The revival ofpr ices in these two big commodit iesbrought cheer to Wall Street, Washington,and many a harassed farmer."

This rally continued to spread to variouscommodit ies including silver and, ofcourse, stocks responded in a like manner.But the lead in this bullish frenzy hadclearly been taken by commodities. Therally in the stock market came with actuallylittle speculative margin buying. The ex-change was collecting data religiously, try-ing to ward off its enemies. On November1, brokers’ loans stood at only 2.33% of the

total market value which was down sharplyfrom the 3.23% at the beginning of Octo-ber. Brokers’ loans were further hamperedby the change in the policy of this marketfor funds. You will recall that in 1929 theFederal Reserve watched the brokers’loans quite closely, publishing figures bro-ken down displaying loans from New Yorkbanks, out of town banks, and the contro-versial "others."

It was this category of "others" that hadsparked much resentment and fury back in1929. Corporations could lend their fundsdirectly into the call money market whichthe banks complained was depriving themof deposits. Well at this point that practicewas declared void. Now brokers’ loanswere listed as to their source either fromNew York banks or out of town banks. Theothers category simply disappeared as bro-kers’ loans declined in volume and stood ata 2.5% yield on the average for this period.

The sudden sharp rally in commoditiesand stocks changed the tone of the pressquite noticeably as we find in this excerpt

Daily Volume Traded on NYSE

Source: Dow Jones

Num

ber

of S

hare

s T

rade

d D

aily

Daily Activity Sept - Dec 1931

Sep Oct Nov Dec

4500

4000

3500

3000

2500

2000

1500

1000

500

0


390

from Time magazine of November 16 ,1931.

"Rising wheat prices rang the speculativetocsin loudly and fiercely last week. Othercommodities became buoyant. Goodcheer spread to Wall Street.

"Although the report that Russia wouldexport no wheat for two years was denied,wheat surged upward. On every recession,buying by the public became more appar-ent. Seats on the Board of Trade jumpedfrom $6,500 to $12,000. Arthur W. Cutten,greatest of living wheat bulls, became al-most a national hero; telegrams poured inupon him asking how high wheat would go.He merely said he was bullish, naming noprices. But in the public imagination "Dol-lar Wheat" became someth ing to beachieved, in some places already achieved.

"‘Dollar Silver’ was another speculativeslogan last week, but more far-fetched thanDollar Wheat. Shorts covering and a gen-eral commodity rise sent the metal to 35.25

cents an ounce against the year’s low of25.75 cents. For the first time silver tradingon the National Metal Exchange, Manhat-tan, became clamorous, wild. Public buyingwas attracted because silver can be boughton a 6% margin. Companies with stakes insilver-currency nations were in demand,shares of mining companies were widelybought. Copper remained at 7 cents but itwas reported that consumers were takingoil offerings. Manchurian was talk aidedbullishness in copper, but the strongest cop-per shares were those with big silver inter-ests.

"With British mills more active, consump-tion in October running 69,83 bales higherthan a year ago, it was natural that cottonshould join the movement that last week’sprice of $33.50 per bale should be 22%higher than the year’s low. Although thecrop is large, unfilled orders for cotton clothjumped 51.7% during October.

Other commodities to share in the jubila-tion included rubber, coffee, cocoa, wool,

Dow Jones Bond Index

Source: Dow Jones

Daily Closing Activity Sept - Dec 1931

Sep Oct Nov Dec

100

95

90

85

80

75

70

65

60


391

hops, hides. Sugar failed to advance, how-ever, and hogs continued in a rut. Mid-Con-tinent oil prices rose 15% a barrel to 85cents; in many sections of the country gaso-line was upped."

Many selected stocks had risen by 40% to50% and some had better than doubled.Everyone was quite bullish and indeed eventhe famed Babson ran a small ad with itsheadline "Is Bear Market Over?" The sharppercentage rise even in the value of seats onthe CBT from $6,500 to $12,000 in onemonth surely brought back dreams that1929 was off and running. With a rally sostrong and only in the first month of itsexistence, it was not unexpected to see wildbullishness calling for fantastic new highs inthe near future.

Banking failures did not cease. The bank-ing industry was still fighting with govern-ment to allow what we all take for grantedtoday: branch banking. The Comptroller ofthe Currency of the time, John W. Pole,continued throughout 1931 to assert his ar-guments in favour of liberalizing the bank-

ing laws to permit branch banking. Muchof the weakness in the banking industry wasin part caused by the isolation of banksthemselves. Many in government fearedthat monopolies would creep up in this fieldas well and they held tight to their ideas asexpressed by the Sherman Anti-Trust Act.But Pole spoke his mind in front of Con-gress in December of 1931, once again. Hesaid:

"In brief, the purpose of the legislationrecommended is to supplement our systemof unit banking by permitting the strongerand better managed city banks to carry onbanking operations in the surrounding ruralcommunit ies by means of branch of-fices...Our present banking problem is onethat concerns primarily and fundamentallythe rural communities and which cannot beautomatically solved by the return of gen-eral prosperity."

The issue of branch banking was one ofmany arguments. Smaller bankers fearedbeing bought out or put out by the bigbanks, but a small bank’s trouble was often

SWISS FRANC

SW

ISS

FR

AN

C P

ER

U.S

. DO

LLA

R MONTHLY: 1931


0.196

0.1955

0.195

0.1945

0.194

0.1935

0.193

0.1925

0.192


392

caused by its location. Banks in the farmingdistricts suffered greatly since the majorityof their clients were dependent upon farmprices. If commodities did poorly, so didthe bank. If that small rural bank were abranch of a city bank, its problems could beovercome through diversification. Thiscause received perhaps its greatest boostduring December when the Secretary of theTreasury, Andrew Mellon, wrote in the an-nual report the following statements:

"The essential question involved is theinability of a large number of small banksto survive in the face of changing economicconditions...I can see no justification in theargument that banking should be confinedto polit ical or other existing artificialboundaries rather than to its natural eco-nomic lines.

"An additional argument against the unitform of banking and in favour of a diversi-fied banking system called branch-bankingwas the evidence of several comparisons.For example, in England, branch banking

was the norm, not the exception. Not onebank folded in Britain between 1920 and1931 even though Britain was clearly suffer-ing the brunt of depression far worse thanthe United States. In Canada, wherebranch banking was also in place, only 12failures had taken place between 1893 and1931, and since 1914 there had been onlyone bank failure, that of the Home Bank in1923. But opponents claimed that Ca-nadas’ experience proved that even branchbanking would not avoid failures. This washardly a decent case to argue since their onefailure stood against the American contrastof nearly 4,000 bank failures between 1929and 1933. But there are always those hard-headed individuals who are opposed tosomething for some strange reason, andeven if this much of a stark difference stoodagainst their position, they would not yield.

California was the only real branch-bank-ing state in the Union. Strangely enough,during 1931 not one bank in California hadfailed. The system of unit banking wasclearly a weak link in the financial system ofthe United States. This would be a majorflaw which definitely contributed much an-guish to the period, striking hard at thefoundation of confidence which was vital tothe entire economy.

Time magazine reported on December28, 1931: "Undisputed good effect of Na-tional Credit Corp’s formation was the re-su ltant improvement in the nat ion ’sconfidence, the return of much hoardedmoney to banks." Indeed the President’snew "Super Plan" had struck right at thecore of the problem, confidence. The lowon the U.S. gold reserves had been reachedduring the final week in October and it rosesteadily throughout November. That wasthe direct result of hoarded gold returning.But political bickering would stall branch-banking and uncooperation on the freeing


393

up of mortgages and the halt of foreclosureswould prevent Hoover’s plan from reallytaking hold for the long run.

The year 1931 was a hard year, yet manypublic works had been completed in themidst of the turmoil. The Empire StateBuilding in New York City, a symbol of thegood times, opened its doors along withNew York’s Waldorf-Astoria Hotel and thefamous Chrysler Building. The Rockefel-ler Center began construction, leasing theland from Columbia University. The Dor-chester Hotel opened on Park Lane in Lon-don and on the lighter side of events,Mickey Mouse and Felix the Cat made theirdebut along with Kate Smith, who sang"When the Moon Comes over the Moun-tain" on radio that year.

But, there was another threat brewingaround the world which Hoover alluded toin a memorandum to Congress when hesolicited their support for his NationalCredit Corporation. H is memorandumwas as follows:

"The nations of Europe have not foundpeace. Hates and fears dominate their re-lations. War injuries have permitted noabatement. The multitude of small democ-racies created by The Treaty of Versailleshave developed excessive nationalism.They have created a maze of trade barriersbetween each other. Underneath all this isthe social turmoil of communism and fas-cism gnawing at the vitals of young democ-racies. The armies of Europe have doubledsince demobilization. They have wastedthe substance which should have gone intoproductive work upon these huge armiesand massive fortifications. They have livedin a maze of changing military alliances andthey have vibrated with enmities and fears.They have borrowed from any foreigncountry willing to lend, and at any rates of

interest, in order to carry unbalanced budg-ets...

"The Allied countries of the Continent -France, Italy and Belgium - are obliged pe-riodically to reduce their impossible debtsby devices of inflation and devaluation.Nineteen countries in the world, in twoyears, have gone through revolutions or vio-lent social disturbances. Whether or notGermany and Central Europe will avoidRussian infiltrated communism or someother ‘ism,’ is still in the balance and thatdoes not contribute to a revival of worldconfidence..."

Indeed the battlefront was forming alongthe lines of communism and capitalism. Onthe very floor of the Congress echoed wordsclaiming that even a dictatorship was betterthan the pains of depression. Socialism andcommunism gained much favour even inthe United States. It has been said manytimes that this was a period in Americanhistory when revolution was close, brewingdeep within the ranks of its citizens.

What was their thinking? Why would somany people begin to turn toward commu-nism during periods of strifes? These arequestions which are undoubtedly a part ofthis period and a part of economic theory aswell. In many ways, communism surroundsus every day even with our working socialand political environments. George Ber-nard Shaw once said: "In economics allroads lead to socialism, though in nine casesout of ten, so far, the economist does notrecognize his destination."

Indeed, even within the United Statesmany aspects of the "New Deal" were verysocialistic. Today arguments can still beheard between social spending and tangiblespending. Even the structure under whichtaxes are collected has been one which dis-


394

criminates against the upper classes in fa-vour of the lower.

The lure of communism is not restrictedto the political arena. It does not alwaystake even the form of the Berlin Wall, whichundoubtedly comes to mind when one men-

tions the word. All these various "isms" areto be found in man’s own desires and attimes they offer what logically can be veryappealing to the masses.

Communism in many ways seeks to pro-tect man from himself. It is the gossip, thejealousy and the greed which communismseeks to stamp out. People who steal fromone another or plot against someone to gaintheir job, position, or wealth all representthe deplorable aspects of mankind whichare perhaps exaggerated under the free-dom of capitalism. If the wealth were notavailable and if everyone was only entitledto the same lot, then such dishonesty wouldtheoretically cease to exist. When onelooks at these things alone, the idea can bepresented in a very pretty package if welook around us we can gain a sense of so-cialism, and also communism even in theUnited States. Our government leans inthat direction when it takes many steps to-ward solving problems or correcting whatmany of us would call injustice. But oftenthe complex maze of governing bodies andtheir laws can be horrifying. It is said thatman has written over 3,000,000 laws butwith this vast arsenal of rules and regula-tions, he has failed to improve upon thesimple Ten Commandments.

Laws are continually changing, but in theprocess they tend to gravitate toward social-istic and even communistic objectives.George Bernard Shaw was correct in thisobservation. It is a natural tendency to con-tinually write laws and to interpret them inorder to get at the dishonest people whoexploit freedom and capitalism throughtheir greed and self-interest pursuits. Forexample, the Supreme Court recently ruledin a case where police raided a mobilehome of a drug dealer. They did not have asearch warrant and under the law they musthave a search warrant before entering any-


395

one’s home. The Supreme Court ruled thata mobile home is somewhat different thana home made of bricks and mortar andthere by claimed that the search was notillegal. Our first reaction is: why should webe appalled at such a decision because afterall the guy was a drug dealer? However, theanswer does not lie in that direction. Theissue is not whether or not the man wasguilty or innocent. The issue is our civil andConstitutional rights.

There is a great difference between beinga liberal who is opposed to everything fromsterilizing pigeons to nuclear energy and anissue of civil or Constitutional rights. TheFBI raided a home and dragged a man andhis wife out of bed and beat them, not tomention that they were treated like scumduring the course of the drug raid. Whilehis wife was partially unclothed and forcedto remain that way in front of the agents ina demoralized state of shock after the FBIkicked their doors in, no drugs were found.What actually happened was that in themiddle of the night the FBI had the wronghouse. Had they been the guilty party, theirrights were nonexistent. The FBI wouldn’tlisten to a word they had to say, perhapsassuming that everyone claims that they areinnocent.

There are numerous cases where policehave set up people, beat them, and openlyviolated rights, all in the so-called pursuit ofjustice. They, in many cases, have made amockery of the Constitution and the cher-ished rights the founding fathers of this na-tion sought to protect. Recently, watchinga television show, I was amazed how 20/20exposed in Florida the Gestapo tactics ofFlorida police who arrested and convictedtwo men for a murder they did not commit.The police simply didn’t like them andthreatened witnesses that if they didn’tidentify these two men, they would be

charged as accomplices. In many ways thisis the beginning of communism. It is notthat we should protect the drug dealer butourselves. If you eliminate the right to pri-vacy and circumvent the need for police toshow probable cause before getting asearch warrant, then in trying to get at thedrug dealer you have waived the rightswhich everyone has fought long and hardfor. Have our relatives and friends whodied in war fought for nothing? Police couldstop you on the street or enter your homewith nothing more than curiosity. Yourhome would no longer be a castle but atarget.

Slowly this urge to get at a certain groupwithin society leads toward measures thaterase the differences between the UnitedStates and Russia. In Russia anyone’s homecan be searched at anytime. People risktheir lives trying to get out of there andwhen interviewed they say that they justwant to be "free!"

Communism in many ways emerges fromthese tendencies to want to get at somegroup and in the course of events it takesaway the freedoms of society in order to doso. Just because a man is a politician doesnot make him honest. Well neither doesthe profession of being a judge, a cop, or anFBI agent. There are honest politicians aswell as crooks, but if you do not have defini-tive rules, then the crooks will be certain totake advantage of the situation. It is there-fore insane to expect that if you eliminateall our civil and Constitutional rights thatwe can sleep soundly at night, knowing thatour police will use self-restraint and notabuse the power given to them. Power cor-rupts, they say, but ultimate power destroys.

If you have ever read Karl Marx you wouldimmediately notice a sense of anger in hiswritings. Marx portrayed the economy as


396

not the natural "invisible hand" of AdamSmith, but as a cosmic war between labourand capital. In the example of getting at thedrug dealer, the natural tendency is to askwhy you should seek to protect the rights ofsuch scum; he deserves what he gets. Butthis same urge to bend the rules to get at thedrug dealer is what Marx wrote of in hisworks. Instead of taking the drugs awayfrom the dealer to put him out of business,take the capital away from the owner to puthim out of business. It is the same humananger in both cases. Perhaps we would notadvocate a war against the capitalist, but wewould against the drug dealer. But to get ateach we ourselves must relinquish certainrights. If we have no rights, then there isnothing to give up, so take the drug dealerand throw him to the lions and we can allenjoy wreaking our vengeance in a publicspectacle such as in Roman days. Thus, ifyou have lost all your capital, you have noth-ing to lose so get the bastard who has all thebucks and take his away to even the score.What is the risk of communism if one hasnothing to lose?

Communism is in simplistic terms theurge to circumvent personal rights. It is saidthat for everything holy there is the unholy.The difference between capitalism and thatof socialism and communism is as stark asday and night. Yet in every democracy thegravitation has always led in the directiontoward communism and control. In manyways it is a gradual process which eventuallycomes to a head. But it has always come toa head at some point in time.

The rights given to us by the Constitutionwere well thought out by the founding fa-thers. They came from their experiencesbased upon first-hand knowledge of theabuses of government. Many of thoserights have already been taken away bycountless laws and Supreme Court deci-

sions. In criminal court you hold the pre-sumption of innocence and it is govern-ment’s job to present the evidence of guilt.But in tax court, you are presumed to beguilty and you must prove your innocence.The IRS or State Revenue Agency can filea lien against you for an outrageous amountof money without even auditing you. If youdo not fight, they can seize all your assetsand sell them at auction. If you later provethat they were wrong, you are only entitledto the amount they obtained for your assets,even though that amount may have been 10cents on the dollar.

There are millions of laws which havetaken away the rights of Americans withoutthem even knowing it. In some way or an-other these laws have been designed to get


397

at that someone or a group which the Con-stitution had sought to protect. The gradu-ated income tax sought to take from therich a greater portion of their assets thanthe middle class. But is not a free societysupposed to be equal and provide justice forall? Where is it fair to take 75% of oneman’s earnings as opposed to 20% of an-other? It should not be unlawful to make alot of money, but then government by lawturns around and says that you are not enti-tled to keep that much.

Whenever some sort of tax cut is pro-posed, the argument is that the rich willbenefit more than the poor and the middleclass. What they are really saying is that thepercentage break will be the same but a10% cut for someone earning $10,000 willgive him only a $1,000, while the $100,000earner will get back $10,000. They claimthat is not fair. Are we a Marxist society orare we supposed to be a democracy?

The Great Depression was a period dur-ing which this anger toward a group withinsociety raged strongly. As we will read ofthe events which transpired in 1932, thisanger and vindictiveness was never greater.Government, while in a rage, used its pow-ers no more or less than those of commu-nistic Russia. The fine lines betweendemocracy and communism disappeared atmany junctions during the events.

The target was not the drug dealer, but thestock market. The Democrats sought tosymbolize this financial center as the evilswhich caused the Depression and with it forpolitical gain, they then tied the knot link-ing it with the Republican party. The tacticsof the Democrats were ruthless and vindic-tive but no more so than when the tide hadturned and the Republicans were successfulin exposing many Democrats with commu-

nistic links when that round of witch huntsbegan following World War II.


398


Chapter XII

1932

1932 arrived on the heels of one of theworst monetary panics of the 20th Cen-

tury. Although fears began to subside overa devaluation of the dollar or an Americanabandonment of the gold standard, opti-mism over the world situation was difficultto find. Capital still remained shaky andready to shift from one currency to anotherwith what often seemed as whimsical as thechange in tides or a shift in the wind. Thepolitical scene within the United States de-generated to one of the worst depths ofwhich any democracy could possibly fall.

1932 was a year which brought communistdemonstrations in Washington and politi-cians turned their sights upon the invest-ment community as a whole. Somepoliticians accused its banks of intention-ally trying to destroy the economy of theworld in an effort to force the United Statesto cancel the outstanding war debts ofEurope so that normal commercial debtscould be settled with the banks. Of courseno such plot had evolved but accusationswere painted with a viol color of hate in nodifferent a manner than that which sparkedthe Russian Revolution.



90

80

70

60

50

40

As if directly out of a text book in psychol-ogy 101, people began to accuse others offaults and deeds which they alone perhapsnourished in the depths of their perverseinner egos. This would be a year in whichthe American political system sank to thelevel not seen since the Spanish inquisitionas it took on many of its horrible predeces-sor’s attributes. Some politicians sup-ported the total abolition of the stockmarket while others urged that the shortsshould be exposed and jailed as if theiractions rose to the level of treason. Al-though the politicians of the era would notadmit that they had taken on many similarcharacteristics which distinguished theRussian Revolution, the deeds, words, acts,and accusations hurled at the investmentcommunity rang a familiar bell soundingthe words once written by Joseph Stalin inhis "Kampf."

"What is the sharpening of the class strug-gle due to? It is due to the fact that thecapitalist elements will not depart from thescene voluntarily; they resist and will con-tinue to resist socialism, for they see thatthe last days of their existence are ap-proaching. And they are still in a positionto resist, since in spite of their relative de-crease, absolutely, they still continue to in-crease; the petty bourgeoisie of town andcountry, as Lenin said, daily and hourly,throw up from their ranks capitalists andsmall capitalists and these capitalist ele-ments go to any length to preserve theirexistence.

"There have yet been no cases in historywhen dying classes have voluntarily de-parted from the scene. There have been nocases in history when the dying bourgeoisiehas not exerted all its remaining strength topreserve its existence. Whether our lowerapparatus is good or bad, our advance, ouroffensive, will reduce the numbers of the

capitalist elements and force them out ofexistence, and they, the dying classes, willresist at all costs."

Stalin’s words ring loud of hatred andbitterness. The Russian Revolution hadbeen born from the Panic of 1919 whencommodity prices collapsed and unemploy-ment ran high. When nothing is left to lose,revolution often fills the emptiness of themoment bringing joyous illusions of utopiaand monetary equality for all. In the samemanner that the Russian communist move-ment began with placing all the blame uponthe rich, here too in the United States poli-ticians turned on their own rich class with asinister intention of placing the blame forall upon the yoke with which they nowsought to enslave that class of society.

Despite the numerous spending programsimplemented by President Hoover, nothingseemed to be working. Confidence waslacking and international distrust and skep-ticism reigned supreme. People were re-luctant to fill orders unless paid in advancefearing that payment in the end mightsomehow never arrive. These fears onlyfurther dampened world trade and theprospects of recovery both economically aswell as in the price levels of commoditiesand stocks not to mention bonds.

The bond markets of the world were dev-astated by the monetary crisis of 1931.Much of the municipal as well as federalissues of South American bonds had goneinto default. Now only super well financedAmerican corporate bonds retained anysense of value while everything else, withthe exception of U.S. Liberty Bonds andTreasury Bonds, crumbled in wake of de-fault fears. Many viewed the bond marketas if it were a game of Russian roulettewhen at any moment some other play wouldbe struck with a fatal wound.

Despite the easing of interest rates on thepart of the Federal Reserve, bonds col-lapsed as the market demanded yields thatwere now as high as 5 times that of thediscount rate. Despite the easing by theFed, the bond market continued to collapseas security dominated yield. Real estatebacked bonds decayed as tangible assets faroutnumbered hard cash and thus a sharpcontraction in the value of all tangible as-sets could not be avoided.

As January of 1932 made its presence feltupon the nation, any hopes began to dissi-pate half way through the month. January1 had begun with the total of listed securi-ties on the New York Stock Exchange val-ued at $26.6 billion down significantly fromnearly $90 billion at the peak in 1929. OnJanuary 1, the U.S. Bureau of Mines re-ported that world production of petroleumduring 1931 had declined 2.8% from 1930levels. This worked out to be 1.3 billion

barrels for total world production, yet theU.S. production share was 850 million ofthat figure. Despite everything, the UnitedStates was still the major producer of oilprior to World War II.

Gasoline exports were off 30% during1931 from 1930 levels. Storage of gasolineduring 1931 had increased by nearly 5%.Bituminous coal production stood at 378million tons for 1931, which was a declineof 19.1% from 1930 levels. Anthracite pro-duction declined 14.2% from 1930 levels,coming in at 59 million tons for 1931.

The value of exports during 1931 totaled$2.4 billion which was a decline of 36.7%from 1930 levels. Imports were $2.08 bil-lion, a decline of 31.7% during 1931. Thefigures clearly illustrated that the U.S. tradesurplus was still narrowing despite the so-called age of protectionism.

The bad news that January had broughtcontinued. The American Railway Associa-tion announced that freight loading reve-nue had declined during 1931 by 18.8%.Union railway workers agreed to accept a10% wage cut yet this was being interpretedas bullish at the time. Shipbuilding yardswere working at 40% of capacity while atthe end of 1931, ships under contract were$58 million compared to $90 million at theend of 1930. Steel ingot production wasrunning at 28% of capacity and declining.Building construction, as reported from 354cities across the nation, showed a decline ofnearly 28% from the amount spent during1930. Business failures were one of the fewthings to rise during 1931. For 1931, fail-ures totaled 28,275 with liabilities of $733million. In 1930, these figures were 26,355with liabilities of $668 million.

The Senate Finance Committee was con-ducting hearings into international banking

and war debts. Testifying was Otto Her-mann Kahn who was requested to providethe Senate with a complete listing of allforeign bond issues which were currently indefault. He obtained that information fromthe institute of international Finance andthe Senate made that list public in January1932. To the dismay of many, the list totaled$815 million worth of foreign bonds de-nominated in dollars. The default involved57 issues and all were an obligation of aSouth American government, state or mu-nicipality. It was revealed that Bolivia, Bra-zil, Chile and Peru had all defaulted on theirgovernment obligations. In Columbia andUruguay, local issues had lapsed into de-fault.

Two shocking aspects were also revealed.First, the majority of the junk bonds wereheld by the small investor who had beenlured into buying them by numerous adver-tising campaigns which touted bonds as the



Rat

e of

Inte

rest

1932


3.5

3

2.5

2

1.5

1

0.5

0

"safe" investment. The other interesting as-pect was how the banks were coping withthe situation. The Comptroller of the Cur-rency issued a demand to all national banksthat they report on what bonds they wereholding. But this problem had been recog-nized back in August 1930. Even goodbonds had been devastated and bankseither faced huge paper losses on what theyheld, or suffered actual cash losses if theysold. The situation was deemed to be seri-ous, but the Comptroller of the Currencydecided to allow the banks to carry thebonds at their cost which naturally boostedtheir statements and masked many of thegrievous problems that faced the bankingindustry at that time.

The report on the gold to paper currencyratio at the Federal Reserve clearly illus-trated that gold hoarding continued to in-crease. The ratio of gold to bank notes anddeposits stood at 73.7% at the end of 1930.But at the end of 1931 the ratio declined to61.9%.

In Brooklyn, an excited woman was re-portedly seen running down the streetscreaming "The bank is closed! The bank isclosed!" What she was so boisterous aboutwas in reality a false alarm. The bank in-volved was the East New York Savings Bankwhich had decided to cut its Saturday hoursto noon instead of 4 PM and had posted anotice to that effect on the door. But thewoman hadn’t looked closely enough to seeit. Well $8 million in cash and swarms ofextra tellers managed to meet head on therun that she had caused. In the aftermath,withdrawals came to $3.5 million againstdeposits of $67.4 million. Although thishad been an unfortunate false alarm, themajority of such circumstances were not.

In spite of the National Credit Corpora-tion, bank failures were still hitting the pa-

pers almost daily. The fears of the peoplewere obviously high and all a bank had todo was close early and a run was virtuallyguaranteed. The National Credit Corpora-tion’s policy, however, was to advance loansonly upon sound collateral. In January1932, it made its first draw of $50 million tocover payments due its creditors.

The good news during January 1932 wasthe talk of Hoover’s Reconstruction Fi-nance Corporation. Most of the optimismduring January had been centered aroundthis issue. Everyone talked about the hugereservoir of credit, which would stimulatethe economy, combined with the proposed10% wage reductions in the railroad indus-try. Many believed that these efforts wouldsurely get the ball rolling once again.

The railroads, which had declined for sixmonths straight during the second half of1930, rebounded quite sharply during thefirst two weeks in January. From the De-cember 1931 low of nearly 31 on the DowJones Index, the rails rallied sharply up to41.5 in early January. The news that theunions were most likely going to accept a10% wage reduction sparked a 33% rallywhich was awesome. But by the end of Janu-ary, the rails fell back and closed at 37.

The Dow Jones Industrials, which hadtraded in a choppy yet essentially straightdown pattern finishing 1931 on its low, ral-lied from that December 1931 low of 73.The industrials reached nearly 86 in earlyJanuary which was about a 19% gain. Butthey finished January back down at the 76level.

The bonds, which had collapsed primarilydue to the South American defaults, did notrally that much and, in fact, they remainedwithin the trading range that had been es-tablished during December 1931. They did

manage to close only 1 point above theDecember closing at the end of January.

The automobile industry had come a longway. By 1932, it ranked next to agricultureand railroads in capital investment. It con-sumed 15.5% of all U.S. steel production,17.4% of aluminum, 82.6% of the Ameri-can rubber, 30% of nickel production and26% of all lead produced. By this timeG.M. had a market share of 43%. Com-modity prices continued to decline as autoproduction also declined. 1931 auto pro-duction was 2.3 million units including cars,trucks and taxicabs. This compared with 3.3million during 1930 and 5.3 million in 1929.The 1931 auto production was off nearly33% from 1930 levels and nearly 55% from1929 levels.

During February, the industrials ralliedback to the January high but managed toclose above the 80 level. The rally had

begun rather abruptly on February 11 whennews came from Washington that Hooverhad managed to obtain cooperation fromall parties to usher through the Glass-Stea-gal bill. This bill broadened the scope ofpaper which was eligible for rediscountingat the Federal Reserve. This was viewed asa liberalization at the Fed which would inturn help many banks to unfreeze assetsthat were previously unacceptable as collat-eral at the Fed. The bill was signed byHoover on February 27.

The rally was further sparked by the newrules imposed by the New York Stock Ex-change against short selling. The Exchangerestricted brokers from lending customerstock to shorts without obtaining writtenpermission from the customer that his stockmay be used in that manner.

Another factor behind the rally was newsof war between China and Japan. The war

scare drove the price of March wheat inChicago up from 2 3/8 cents to 58 3/4 cents.This is no typo. The rally was unbelievablebut the declines that followed were equallygreat and wheat fell to new record lows inJuly and again in November. In the stockmarket many speculated on what compa-nies would benefit. But the yen itself col-lapsed. Japan had abandoned the goldstandard just a few months before. The yenfell from the par level of 49.84 cents to 35cents. Japanese bonds collapsed from 100to 61. The total U.S. investment in Japanwas reported to be some $450 million, ofwhich $390 million was Japanese bonds.The real concern centered over the fact thatJapan’s gold reserves had dropped to $190million which represented half of the out-standing debt to the United States alone.

The Dow Jones Industrials sold off a bittoward the end of the month when on Feb-ruary 29 the State of New York raised the

tax on stock transfers from 2 cents to 4 centsper share. Depression or not, some statesoffset declining revenue due to lower levelsof economic activity.

The Fed had lowered the discount ratefrom 3.5% to 3% on February 26 but thishad little effect upon the market consider-ing the dramatic increases that took placeduring October 1931. Call money re-mained low, averaging between 3.5% to 3%during the first quarter of 1932.

In Germany, the government approvedthe merger of two leading banks. Theywere Dresdner and Darmstaedter. InFrance, the government placed restrictionsupon the amount of gold it would pay underits gold standard. To avoid demand fromthe French public, reputed to be the largestgold hoarding people in the world, theFrench government stated that it wouldonly make gold payments in $8,000 lot mini-

FRENCH FRANCF

RE

NC

H F

RA

NC

PE

R U

.S. D

OLL

AR MONTHLY: 1932


25.66

25.64

25.62

25.6

25.58

25.56

25.54

25.52

25.5

25.48

25.46

25.44

25.42

25.4

25.38

DUTCH GUILDER

DU

TC

H G

UIL

DE

R P

ER

U.S

. DO

LLA

R

MONTHLY: 1932


40.55

40.5

40.45

40.4

40.35

40.3

40.25

40.2

40.15

Indian - Rupee


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.37

0.36

0.35

0.34

0.33

0.32

0.31

0.3

0.29

0.28

0.27

0.26

0.25

SWISS FRANC

SW

ISS

FR

AN

C P

ER

U.S

.DO

LLA

R

MONTHLY: 1932


0.1952

0.195

0.1948

0.1946

0.1944

0.1942

0.194

0.1938

0.1936

0.1934

0.1932

0.193

0.1928

0.1926

0.1924

0.1922

mums. As a result, gold coins were in highdemand.

In the French papers, advertisements be-gan to appear offering U.S. $20 gold coinsat a premium. The coins were selling for$21.50 (550fr) at first and then began to riseto $25. The demand became so great thatthe shipping companies announced a price-hike to transport gold coin. The shippingrates are raised from $1.875 per million to$2,500. The New York banks, which did notprofit from these transactions refused torelease gold coins and informed the Frenchgold dealers that they had to apply to theFederal Reserve Bank or the U.S. AssayOffice. U.S. $20 gold coins began to riseeven further reaching as much as $30. Tothis very day, huge hoards of United Statesgold coins remain in Europe.

Amidst the scramble for gold, a miningfever broke out in Sweden where some 41

claims had been staked out. Actual bullionmined during 1931 amounted to nearly $7million.

In the United States, many contracts be-gan to be issued in terms which requiredpayment in gold coin. On the streets, U.S.gold coin began to command a premiumover and above paper currency.

While gold was rising in street value, othercommodities continued to decline. Sugarfell to 1 cent per pound a record low. Cop-per was bringing 6 7/8 cents per pound forexport and 6 1/4 cents for domestic delivery.Copper was so depressed that an offer tothrow in 50 shares of Anaconda or Kenne-cott was made for each 1,000 ton order.Rubber fell through its old historic lowdropping to 4 cents in February.

In February, the business failure statisticsfor January were released. They were the

Japanese Yen


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1931 - Dec. 1932

1931 1932 1933

0.5

0.4

0.3

0.2

0.1

0

highest on record for any month. Duringthe first month in 1932, 3,065 firms bit thedust and along with them $266 million inliabilities. Among the failure listings were290 banks which accounted for $145 millionin the liability figures.

Among those that went into receivershipduring January 1932, one found a variety ofcompanies. Several sugar companies wentdown along with utilities such as Texas-Louisiana Power Co., Piedmont UtilitiesCo., and Arizona Edison. Also includedwere Hamilton Gas Co., Hudson RiverNavigation Corp. Western Steel ProductsLtd., Long- Bell Lumber Corp., and theCincinnati & Lake Erie Railroad Company.The list of failures was indeed widespread,touching commodity oriented companies aswell as railroads and utilities industrieswhich today are regarded as semi-blue chip.

Yet there are always exceptions. SomeUtilities posted higher earnings for 1931

over and above those reported during 1930.There were some problems in analyzing theearnings. A number of companies wereselling off assets and chalking up profits andposting them to the earnings columns. Thisnaturally distorted some of the figures. F.W.Woolworth was one such example. It re-ported 1931 earnings of $41 million com-pared to $35 million during 1930. But thecompany had sold off stock in its Britishventure, realizing $10 million in profit.Therefore, the true picture from sales illus-trated a $31 million earnings record for1931 which was down slightly more than10% from 1930.

Most manufacturers were not so lucky. Ina survey released by the National City Bank,it was revealed that 1931 earnings were off72% from 1929 levels and 52.9% from 1930levels. Deficits were reported by 39% ofU .S. corporations. The industries thatseemed to do the best were tobacco, shoes,and chain stores. The following listing

BONDSMONTHLY: 1932


84

83

82

81

80

79

78

77

76

75

74

73

72

71

70

69

68

67

66

65

compares 1931 and 1930 earnings of a fewselected companies.

Earnings Comparison in Millions US$

Company 1931 1930 %change

American Tobacco 46,189 43,294 + 6.2

AT&T 166,666 165,544 + 0.6

Auburn Automobile 3,579 1,018 + 71.5

Brown shoe 1,356 1,334 + 3.2


Coca-Cola 14,023 13,515 + 7.2

Cream of Wheat 1,504 1,868 -19.4

Firestone Tire 4,219 1,541 + 63.4

General Electric 40,956 57,490 -28.7

McGraw-Hill 869 2,021 -57.0

National Distillers 372 307 + 17.4

R.J. Reynolds 36,396 34,256 + 5.8

Scott Paper 997 986 + 1.1

Standard Brands 14,542 16,402 -11.3

The bonds consolidated during February,trading between 80 and 78. During Marchthey rallied slightly above the 82 level whichat least had barely penetrated the Decem-ber 1931 high. But by the end of March thebonds literally collapsed, falling to slightlyabove 78 and closing on the low for themonth.

During the very early part of March, themarkets were quite active. The Dow JonesIndustrials had rallied to a new high for theyear testing 88.78; railroads 38.65; and theutilities 35.92. But March was a busymonth. The U.S. Senate adopted a resolu-tion on March 4 to investigate stock markettrading. The sentiment had turned in fa-vour of blaming the entire affair on thosewho were selling the market short. Timemagazine carried this little note on March14 remarking about the sentiment towardthe shorts.

"Most U.S. citizens have been hurt by thedecline in prices. Many of them cannot

believe present prices are justified by futureprospects. Most of them believe bears ‘sell-ing what they did not own’ depress prices.Many of them including their President aresure that the market’s decline made busi-ness worse. In normal times nobody likes abear. When the bear has been right and thepeople wrong, they dislike him even moreintensely. Wall Street last week awaited thestart of the Senate’s investigation with somefear, much curiosity. Its fear was chieflythat the probe might evolve into a punitivebear-hunt out of which would grow legisla-tive restrictions upon a free and open mar-ket."

When the Senate’s investigation beganthere was no doubt in its members’ mindsthat the target of their efforts was the bears.The sentiment was clear. There were fewwho did not enter that investigation withoutsome malice toward the short sellers. Thechairman of the Banking & Currency Com-mittee Peter Norbeck, mounted the attack.When the press asked him for a commentas to what effect his investigation wouldhave on the stock market, his reply wassimply: "I don’t know and I don’t care!"Between Norbeck and the infamous Sena-tor Glass, reputed for his hatred and hisrash accusations throughout the collapse ofthe market, it was Senator Frederic C. Wal-cott and Senator James Couzens who atleast managed to persuade the Committeeto investigate the bulls as well as the bears.Senator Couzens told the press: "We are notseeking sensationalism...and we are goingabout this in a sane way. There is no inten-tion...to seek legislation interfering with theregular operations of the stock exchanges."

On March 7, President Hoover author-ized the American National Red Cross todistribute 40 million bushels of wheat forrelief purposes. That wheat was providedby the Grain Stabilization Corporation. On

March 9, the Department of Agricultureannounced that crops would be substan-tially higher. Corn production was esti-mated to rise from 703 million bushels to1.1 billion. Wheat production was esti-mated to jump from 161 million bushels to207 million. Commodities in general re-mained depressed and production seemedto only increase.

In March, a well-known accounting firmreleased its survey of the situation. Thefirm of Ernst & Ernst reported that a 1921study of 379 industrials showed that thecompanies had suffered a decline in totalearnings of 91.64% from the 1920 high into1921. In 1931, however, their analysis illus-trated a shocking difference. These samecompanies posted earnings which had de-clined by only 78.09%. The Dow JonesIndustrials themselves were posting a com-bined decline in earnings from the 1929high to the end of 1931 of some 79.78%.This study illustrated the paradox whichfaced the nation. Here earnings were stillat least present and on the surface did notappear to be as devastated as they wereduring the panic of 1920 moving into thedeflationary period of 1921. Yet in 1932,prices were substantially the same or per-haps lower in comparison to the lows whichhad been established during 1921. Therewas no logic to this period of the GreatDepression. It was an emotional period ofwithdrawal which in turn was reflected inthe prices of common stock. On March 12,1932 came news that Ivar Kreuger, chair-man of the famous Swedish Match Co., andKreuger & Toll, committed suicide. Thiswas the man who had lent nations money topromote his match monopoly. Details ofwhy were not yet available but the marketsold off as another wealthy industrialistjoined his ancestors. The details would beknown soon and the scandal only grew.

As the first quarter of 1932 came to aconclusion, most remained very confused.Banking scares continued to dominate theissue of everyday life and suicide reportscontinued to show up in the obituaries.Fear over the new investigations loomedover the stock market like ventures, and thefuture seemed to be bleak despite the vari-ous programs which Hoover continued toinstitute in hope of stemming the tide ofpessimism as well as decline in economicactivity. Spending levels on the part of gov-ernment continued to bring nothing butfleeting hopes which soon disappeared withthe next day’s trading activity.

During the first quarter of 1932, volumein the New York Stock Exchange had de-clined sharply from levels recorded duringthe decline in December 1930 which hadreached 50 million shares for the entiremonth. When the trend turned upward inJanuary 1932, volume had declined to 34.3million shares, a noticeable decrease fromDecember when the trend had been down.As the market consolidated in February yetpushed a bit higher, volume declined evenfurther, posting sales of only 31.7 millionshares. As the market continued to rallyduring the early part of March, volume av-eraged 1.5 million shares per day. Towardthe later portion of March as the marketbegan to collapse, volume actually declinedbut overall the month of March showed aslight increase posting sales of 33 millionshares.

The trend was still obviously biased to-ward the downside. Volume on the otherhand began to diminish sharply, droppingto 31.4 million shares in April followed by23 million share periods during May andJune when the market was moving into itsfinal low. Interest in the stock market haddeclined significantly as many a floor bro-ker died a slow and boring death. Yet on a

percentage basis, the market was aboutready to equal the force of the panic of 1907and that of the panic of 1920 on a price level.Volume clearly began to dry up after thesharp blood bath of 1931. Most of thespeculative positions had been wiped out bythat time. When the market moved into thesummer of 1932 for its final low, trading wassubstantially lower than it had been duringprevious years.

As the second quarter of April emerged,the Dow Jones Industrials continued withthe same trend that March had sustaineduntil the bitter end. The industrials openedabout unchanged and managed to test74.38, closing at 72.18 that day. April 1 hadestablished the high for the entire month.The railroads utilities and the bonds allestablished their highs for the month ofApril virtually on the opening bell. Fromthere onward, April would bring only moredevastation. By Tuesday, April 5, the indus-trials had fallen to within a few points of the1921 low. Normally, any technical traderwould expect that the market would at leastpause at such an important previous low.But on April 8, the market hardly remem-bered what the 1921 low had been as it fellright through it, establishing the low of theday at 61.98 and closing under the 1921 lowwhich was 63.90. Volume had reached 2.2million shares that day. Such volume abovethe 2 million share level was becoming arare event in itself. Volume on some dayshad declined to as little as 471,000 shares.

April seemed to exemplify the famousMurphy’s Law of "whatever can go wrongwill go wrong," to its full meaning. That wasthe fate for the stock market as the secondquarter had begun. The month of Aprilcontinued to witness a massive liquidationof stock positions. Week after week themarket continued lower plagued by thethreat of the Senate investigation coupled

with bearish reports that railroad car load-ings continued to fall. From Washington,the market feared the pending tax bill andamong its own ranks, it was very displeasedwhen U.S. Steel announced the omission ofits dividend. Other companies began tofollow this lead and dividend omissions be-gan to rise.

On April 5, news came that MontaguNorman had been reappointed as the Gov-ernor of the Bank of England for the thir-teenth time. In Stockholm a commissionwas appointed to investigate the dealings ofKreuger & Toll as rumor gave way to thereality of huge misrepresentations. Mean-while in Germany, Paul Von Hindenburgwas elected President by a majority ofnearly 6 million votes on April 10.

The League of Nations reported on April12 that international unemployment wasestimated to be approximately 20 million.The U.S. State Department began holdinga conference to consider what steps couldpossibly be taken to protect the U.S. hold-ers of foreign bond issues which were indefault.

On the 16th of April, the Middle WestUtilities Co. applied for an application toenter into receivership. This was merelyanother nail in the coffin which sent shiversdown the spines of those who had thoughtthat at least utilities would weather the eco-nomic storm.

On the 19th of April, Chile abandoned thegold standard. For nine months, Chile un-successfully attempted to maintain the pesoat par. They had imposed extremely rigidforeign exchange controls but sumptuarylaws could not overcome the reality of thesituation. Fears of further loan defaultssent the bonds crashing down nearly 30 ba-sis points that day.

On the 25th of April, Greece also aban-doned the gold standard. Foreign exchangemarkets were in disarray. The Britishpound, which had fallen from the par valuelast seen during April, 1931 before the de-valuation, had begun to fall once again,dropping to $3.65 from its March high of$3.77. The downtrend would eventuallycontinue into November of 1932 when thepound would drop to $3.15. Now only theFrench and the Swiss currencies remainedsteady.

Trading volume on the New York StockExchange during April had declined to 31.4million shares. This was the first panic selloff where new lows were achieved on lowervolume.

Time magazine reported in its April 4,1932 edition that corporations were writingdown the stated value of their common

stock. Common stock was carried on theliabilities side of the balance shoot. Bywriting down the value of their commonstock, they obviously reduced their liabili-ties and enhanced the overall appearanceof the company’s books. In many cases, thiscreated a surplus which to some degreefurther clouded the true performance dur-ing the period. But in one sense, the liabili-ties had been greatly reduced. After all, thevalue of the Dow Jones Industrials was now20% of the 1929 high. Therefore, their li-abilities were considerably less in a veryreal sense.

In Washington, the Senate investigation ofWall Street began to turn into a witch hunt.The President of the New York Stock Ex-change, Richard Whitney was summonedto Washington by an urgent phone call. Ap-parently a telegram from a close friend ofthe President’s was received in which it wasalleged that a "billion-dollar bear raid" had

Chilean - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.1222

0.122

0.1218

0.1216

0.1214

0.1212

0.121

0.1208

0.1206

0.1204

0.1202

0.12

0.1198

0.1196

Chinese - Tael


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.7

0.65

0.6

0.55

0.5

0.45

0.4

0.35

0.3

0.25

Hong Kong - Dollar


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.54

0.52

0.5

0.48

0.46

0.44

0.42

0.4

0.38

0.36

0.34

0.32

0.3

0.28

0.26

0.24

0.22

Greek - Drachma


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.01335

0.0133

0.01325

0.0132

0.01315

0.0131

0.01305

0.013

0.01295

0.0129

Columbian - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.981

0.98

0.979

0.978

0.977

0.976

0.975

0.974

0.973

0.972

0.971

0.97

0.969

0.968

0.967

0.966

0.965

0.964

0.963

Argentine - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.43

0.42

0.41

0.4

0.39

0.38

0.37

0.36

0.35

0.34

0.33

0.32

0.31

0.3

0.29

0.28

0.27

0.26

0.25

0.24

0.23

Brazilian - Mil Reis


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.13

0.12

0.11

0.1

0.09

0.08

0.07

0.06

0.05

Peruvian - Libra


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

4.5

4

3.5

3

2.5

2

1.5

1

0.5

0

Uruguayan - Peso


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

been at work in the market. Senator Walcotasked Mr. Whitney to prepare a completelist of names of those who had sold shortpositions in the market.

Whitney faced what was reported as asomewhat hostile Committee. Time maga-zine reported that Claude R. Branch, thespecial attorney for the Committee wasvery zealous and "irritating." Senator Nor-beck was noted to be very "impatient."Senator Glass was his usual self, "sarcastic,"and Senator Smith Wildman Brookhardwas very "belligerent."

They taunted and badgered Whitney as ifhe was a criminal. Whitney again deniedthat professional bears had anything to dowith the decline in market values. Whitneypointed out that short interest had declinedby 230,000 shares the week before yet themarket still fell to a new record low. Whit-ney pointed out that a similar condition hadexisted the previous October when pricestumbled. In response to their inquisition ofbear-raiders, Whitney replied: "Our inves-tigations have disclosed no bear raids!"

The Committee managed to extract fromhim a statement in which he agreed thatperhaps officials who had made bullishstatements might have induced small inves-tors into buying stocks which made SenatorGlass’ day. But when pressed as to why themarket had then declined, Whitney replied:"Liquidation by frightened investors whoare giving these United States of oursaway."

The interrogation continued as if it werethe Spanish inquisition.

Senator Couzens: It has come to my atten-tion that a broker may use his customer’sstock to depress the value of that stock.

Mr. Whitney: Senator Couzens, I denythat!Senator Couzens: How do you detect it?Mr. Whitney: Our men check the broker-

age offices.Senator Brookhart: Do you think the

rules you are constantly citing are enforcedor evaded?Senator Blaine: Maybe he thinks they are

enforced better than the Prohibition Law ofthe Federal Government.Senator Brookhart: You brought this

country to the greatest panic in history!Mr. Whitney: We have brought this coun-

try, sir, to its standing in the world by specu-lation. You think you can affect the worldby changing the rules of a stock exchange orboard of trade?Senator Brookhart: Yes, we can change

them by abolishing the stock exchange andboard of trade so far as speculation is con-cerned!Mr. Whitney: And then the people of the

United States will go to Canada and Europeto do those very things and pay their taxesthere!

In reading over the dialogue of Mr. Whit-ney’s interrogation, one begins to wonderwhether or not he was before a committeeof the Communist Party in Russia. Werethese comments coming from elected offi-cials in a so-called free society?

Before the Banking & Currency Commit-tee, Mr. Whitney handed over the list of24,000 names of those who had positions inthe market. This was April 8, one day be-fore the supposed "billion-dollar bear raid"had taken place. The Committee began toinstantly sift through the list searching forthe names of those who had shorted themarkets. Many prominent and nationallywell-known names were among the list.But Senator Walcot argued against the pub-lication of any names.

During the later part of April, the marketcontinued to tumble largely on the news ofthe Kreuger Scandal. It seems as thoughthe King of the Swedish Match Co. hadsome cash flow problems back in 1931. Heobtained some copper plates which weresimilar to that of Italian government bonds.He took the plates and ran off 42 bondswhich each carried a face value of 500,000pounds. He swapped the counterfeits withgood bonds in the company’s portfolio andproceeded to borrow against them. It wasreported that when asked about the Italianbonds in the company’s portfolio, he re-plied that relations between France and It-aly were strained and that no mentionshould be made of his loan to the Italiangovernment. This didn’t seem out of line.If you recall, he had lent sizable amounts ofmoney to both Germany and France in re-turn for monopoly concessions for matchesin these nations.

As May entered the arena there seemedto be no easing in the downtrend for equi-ties. The Dow Jones Industrials fell almostcontinuously straight down, closing May onthe low for the month. Yet volume declinedconsiderably dropping to 23.1 millionshares. Only Six days during the entiremonth managed to trade more than a mil-lion shares. Most days averaged between600,000 and 700,000 shares. At the close ofMay, the industrials stood at 44.74 downvirtually 50% since the March high. Bondshad also continued to decline and droppeddown to close on the low for the month aswell at 66.30 which was substantially belowthe March high of 82.30. The railroads hadclosed May at 14.30, off nearly 60% fromthe March high of 38.65. The utilities hadalso declined sharply falling from theirMarch high of 35.92 and closing May at17.74, off virtually by 50%.

Many of the same issues which hadplagued and influenced the market merelyintensified. The Federal Government hadentered a deficit in its budget and the pend-ing tax bill seemed to be going nowhere.Meanwhile, spending increased as Hooversought to create jobs for the unemployed.It was the billions of dollars being spent inrecovery attempts that scared Europe morethan anything. Gold outflows began to in-crease. Many called for the end of theUnited States. Everyone had been used tobudget surpluses and trade surpluses aswell. The thought that deficits were takingplace gave some hope that the increasedspending would stimulate the economywhile others saw a trend which pointed tothe collapse of the nation through deficits.

The dividend news continued to getworse. The New York Central Railroadhad omitted its dividend for the first time in62 years. G.M. reduced its dividend spark-ing further pessimism.

On the 1st of May, a strike had beendeclared by 32 building trade unions in NewYork. On the 11th of May PresidentH oover vetoed the bill to amend theSmoot-Hawley Tariff Act of 1930 whichsought to restrict the powers of the Presi-dent under the flexible tariff provisions.

On the 16th of May, U.S. Steel Corpora-tion again cut wages by 15%. Most com-modities continued to decline and zinc fellto its lowest point on May 18, reaching 2.275cents.

On May 24, 1932, the Kreuger & TollCompany, which was the parent company ofthe interests of Ivar Kreuger, filed for bank-ruptcy.

On May 25, 1932 Britain finally signed anagreement under which it would resume

payment on its debt owed to the UnitedStates which had been postponed under themoratorium.

Sugar reached bottom for the year at .057cents. Many had thought that sugar wouldhold the 1 cent level. But sure enough, theimpossible had happened. Sugar fell belowthe 1 cent level that day.

In Washington, the witch hunt continued.During April’s assault upon Mr. Whitney,Senator Norbeck lost his cool and shoutedat Whitney "You’re hopeless!" when Whit-ney refused to acknowledge that shorts hadforced the market lower.

The Special Attorney was replaced byWilliam A. Gray but he was not much bet-ter. Yet the shocking event came when theCommittee began to publish the list of 350short players who had taken part in thestock market. It was unbelievable. The en-tire affair made a mockery of this free sys-tem.

The list naturally included many well-known names. Among them were the fol-lowing:

Percy RockefellerMatthew BrushBernard E. ("Sell’em Ben") SmithArthur Cutten (Famed bull in Wheat)B.C. Neidecker (Head Travelers Bank)Raymond Patenotre (French Deputy)Marquis de San MiguelZ almon G ilbert Simmons (Simmons

Beds)

The Senate began to drag them all in torake them over the coals so to speak. PercyRockefeller was taunted without mercy byCounsel Gray looking, as always, to make aname to himself over someone else’s deadand battered body. Gray conjured up every

deceitful scenario he could imagine accus-ing Percy Rockefeller of slanderous thingsincluding sitting on bank boards and havingknowledge of distress sales in advance. Butevidence never supported such wild accusa-tions for Rockefeller never had a lot ofshort positions at any time.

Gray: There has been rumor that youbroke with President Hoover and became ashort seller to depress prices. Is that rumorcorrect?Rockefeller: Now what object would I have

in doing a thing like that?Gray: Perhaps to hurt Mr. H oover’s

chance for re-election.Rockefeller: Oh no! I am a Republican.Gray: Senator Walsh just said he believes

international bankers have smashed themarket to force the United States into aposition where we must cancel War Debts.Do you think he is correct in that belief ?Rockefeller: All those stories are ridicu-

lous it seems to me.

Rockefeller at his peak had 12,000 sharesshort but had not been short for some time.They pressed him as to how much he madefrom the stock market. "My own losseshave been terrible," said Rockefeller.Senator Couzens appeared as if he didn’twant to accept the fact that Rockefellerhadn’t made any money. "How much isterrible?" Couzens asked. "A good manymillion!" replied Rockefeller.

Senator Copeland of New York had justwalked in to listen to what was going on. Hestayed but for only a short while and foundthe entire proceedings very disdainful. Areporter for Time magazine overheard hiscomment which was "They are conductingthis like a police court!" Indeed, the hear-ings were in search of capitalists who couldbe hung out in public and all wrongs thereby

placed upon a few in no way different thanthe vengeful days of Stalin and Lenin.

The Senators continued probing and har-assing their victims, hell bent on laying theblame for the depression upon the wholelot of speculators who had dared to sell thestock market short. Evidence which hadbeen presented by the New York Stock Ex-change which unquestionably failed to pro-duce a massive bear pool was of noconsequence. The Senators continuedwithout probable cause and without re-straint. If any such investigation shouldhave been launched, it should have beenconducted into the mismanaging of affairson the part of government focusing notmerely on the Anti-Trust laws, but on thedubious tactics of floating unsecured sover-eign debt.

Thomas E. Bragg, a well-known stockmarket player, was next in line to be pulledapart by the inquisition. Bragg admitted tohaving at times as much as 50,000 shares onthe short side, but on the average his posi-tion was 12,000 to 15,000 shares. AlthoughBragg was one of the largest short playersuncovered by the blood-thirsty Senators,50,000 shares in the midst of 5 million sharedays was still like spitting in the ocean andexpecting to alter the tide.

Bragg denied taking part in any bear-raidor bear-pool but admitted that he had takenpart in a bull-pool which totaled $32 millionin Anaconda Copper prior to the break in1929. The questioning thereby turned to-ward his bullish days when nothing of mas-sive bear-raider could be hung around hisneck.

Gray: How much did you put in?Bragg: About $500,000. I think Ben Smith

put in a half million and Mr. Rockefeller$120,000.

Gray: Go ahead and name the others.

Tom Bragg went on to name John Raskob,Chairman of the Democratic NationalCommittee, Willy Durant, Frederic J.Fisher and others.

Senator Couzens: How did the operationcome out?Bragg: I lost $400,000, others may have

lost more.Senator Couzens: What representations

were held out to get people to join?Bragg: Possible profit.Gray: Wasn’t that pool formed because of

the ability of this group to manipulate themarket?Bragg: I don’t think there was any manipu-

lation.Gray: Oh be a little frank with this com-

mittee. You just didn’t take $32 million intothe market and sit down and wait. Tell ussome truth!Senator Glass: I protest against bully rag-

ging the witness that way.

The Senator’s bear-hunt continued, call-ing John Jacob Raskob, Chairman of theNational Democratic Committee, to thestand. Senator Norbeck was dying to hanga few Democrats with the Presidential elec-tions coming due in the fall. Senator Glasswas a Democrat. He demanded of CounselGray:

Senator Glass: "Are you calling anyprominent Republicans?"Senator Norbeck jumped in: "If Senator

Glass will name them we will gladly callthem."Senator Glass began to shout: "It isn’t my

place to call them!"Gray broke in and said: "If I’m directed to

proceed no further with Mr. Raskob be-cause he is chairman of the DemocraticNational Committee, I’ll go not further."

Senator Glass immediately backed offmurmuring: "Oh no, I was just, ah, wonder-ing, ah..."

Raskob had brought with him itemizedaccounts of his stock dealings. After somebadgering, as seemed appropriate for thisposse, it became clear that Roskob, famedbull was indeed a bull to the very end.Raskob had lost so much that they asked ifit was indeed all his money to begin with?"All my own!" he sadly replied.

But Time magazine reported Raskob’sclosing words to the distinguished Commit-tee,

"I have always been long of stocks. ... Nev-ertheless, I think that short-selling is a per-fectly legitimate thing, though it may havebeen terribly abused. And I believe that ifthe American people had been more famil-iar with it ... during the boom our conditionswould not have become so bad. Short-sell-ing has its place and a very good place too."

The bear-hunt continued despite theemotional parting words of Raskob. Graysummoned William Fox, once the proudowner of Fox Films. William Fox, upon hisarrival in Washington, became ill. Fox’sdoctor claimed he had an attack and statedthat he believed Fox had diabetes. ButGray, depraved, perverse and suspicious aperson as he was, held true to his character.Gray simply wouldn’t believe him. Grayhired a physician to check Mr. Fox’s condi-tion with orders to report directly to Mr.Gray. When that doctor also reported thatWilliam Fox was seriously ill, Gray still re-fused to believe it and then hired a thirddoctor ordering him to check the conditionof this Mr. Fox. All three doctors agreedthat Fox was indeed very ill.

Gray still scoffed at the situation and pro-ceeded with his case against Fox without hisbeing present to raise his own defense.Gray charged Fox had "wrecked" his formercompanies through stock market activity.He revealed countless details of his stocktransactions right down to how much hisdaughter had owned. But all the evidencewhich Gray had compiled did not show Foxas a bear-raider but as a dead and batteredbull. Gray was still not satisfied. Gray un-covered what he called a fraud. Gray ac-cused Fox on one transaction out of severalthousands of willful fraud again while Foxwas still confined to his bed. Fox had dealtin the name of his company as well as in hispersonal name from time to time. Graycharged that on one transaction Fox haddeducted a loss incurred in the marketwhich he claimed the company had origi-nally paid for.

The Committee naturally flaunted this inthe face of the press and then announcedthat they were turning Mr. Fox over to theIRS. Mr. Gray took much pleasure in an-nouncing publicly that "the recovery ofevaded income tax will offset the expense(of the proceedings) 100 times," as theyvoted to continue the investigation despitehaving failed to turn up the illustrious bearwho had supposedly destroyed the marketand perpetrated the Depression upon theentire world.

Thomas Jefferson once said "Sometimesit is said that man cannot be trusted with thegovernment of himself. Can he then betrusted with the government of others? Orhave we found angels in the forms of kingsto govern him? Let history answer thisquestion." Indeed history answered Jeffer-son. If man supposedly cannot be trustedwith governing his own actions, for whichreason the Senate instituted these proceed-ings, the men who sat at the table of that

Committee were of no different stock orbreed. They were no better than those whothey sought to judge and in the process theyignored those enlightened dreams whichtook form in the Bill of Rights.

William A. Gray and the rest of the Com-mittee lowered those standards of govern-ment to the very gutter. Gray, with his fullwavy head of hair and his beady eyes whichhid behind a pair of wire rim glasses, triedto set himself up as God to rule and judgeothers. No one ever asked if he had owneda single share of stock. Perhaps he did;perhaps not. But he attempted to turn theonly motive for buying stocks into the mostseedy act worthy of the highest criminalpenalty. All the freedoms which many anAmerican had died for in every war sincethe Revolution were ignored by an enragedgovernment bent on revenge. What of theConstitution? No words could protect thepublic from these self imposed tyrants.

Thomas Jefferson also wrote: "Still onething more, fellow citizens - a wise andfrugal government, which shall restrainman from injuring one another which shallleave them otherwise free to regulate theirown pursuits of industry and improvementand shall not take from the mouth of laborthe bread it has earned. This is the sum ofgood government, and this is necessary toclose the circle of our felicities."

It was with this rage toward the stock mar-ket that a new philosophy began to takehold in the United States and the balanceof the free world. Although governmentswould stop short of full blown communism,laws progressively took a direction towarda socialistic state. The graduated incometax would eventually rise to 90%. The gov-ernment used its taxing powers to get at therich and upper classes who had participatedin the stock market. Since one could not

constitutionally take away their rights toinvest government sought in the decadesthat followed to raise taxes to such heightsthat not much income would be left forspeculation. The spirit of individualismwas dealt a severe and shocking blow. Theactions taken by the Senate could be takenjust as easily and most assuredly again givenan economic convulsion of this magnitude.

The infamous Mr. Gray was far from sat-isfied. His next victim in his Roman style ofpublic spectacle was called in; Charles E.Mitchell, Chairman of the Board of Na-tional City Bank. Gray probed and badg-ered Mitchell whose bank had ill-advisedmany clients to buy Anaconda Copper. Thebank had sold 300,000 shares at $125 ashare which by now were trading at mere $4.Mitchell denied Gray’s accusations thatperhaps the bank used high pressure tacticsto sell the stock to an unsuspecting publicas if Mitchell or anyone could have foresawthe depths to which the market would havefallen two years in advance. Given the at-mosphere at the time, the accusation wascompletely ridiculous. It didn’t take highpressure salesman to sell stock back in thesummer of 1929.

Gray’s accusations and interrogationswere reaching much too high a level of zeal.Most of the Senators didn’t even show upthe next day to listen to Gray’s further in-quisitions into the Anaconda Copper deal-in gs. O n ly Se n a t o r s No r b e ck an dTownsend appeared. Gray summoned theChairman of the Board of Anaconda Cop-per himself, John D. Ryan. The interroga-tion continued as accusations from Graygrew more bold. The President of Ana-conda, Cornelius F. Kelly, became so an-noyed that he jumped up and yelled at theCommittee, "Mr. Gray is trying to ride thewitness for the benefit of the gallery!"Senator Norbeck threatened to put Kelly

on the stand if he didn’t shut up. Could thisreally be the land of liberty or was it anightmare? Gray’s accusations were totallyunfounded. He would say anything and doanything to try to get somebody to admit toanything at all. It was hardly as if Ana-conda’s decline in the market was an iso-lated incident. Then perhaps one might beable to accuse manipulation. But Ana-conda was but one issue in a tidal pool ofdeclin ing stocks on eve ry exchangethroughout the world.

Gray’s accusations were, of course, car-ried by the press. Whether they were wellfounded or not, they made great gossip toslander and destroy those who had beenforced to submit to G ray’s perverserantings. The damage to reputations ofmany who had been placed on the rack wasbeyond repair. As a result of the hearings,William Fox had numerous law suits filedagainst him without evidence but solelyupon the allegations made by Gray. Char-les Mitchell, a long-time personal target ofSenator Glass, was forced to resign as headof the National City Bank. Other resigna-tions were also caused by Gray. The headof Chase Manhattan Bank, Albert Wiggin,was also forced to resign. In each case, noone had been a bear-raider but instead theywere chastised for being bulls. Most hadlost money but that didn’t matter.

Herbert Hoover wrote in his memoirsthat the inquisition was at his direction. Hewrote..."I urged that the committee launchan investigation of practices of the Ex-change, with a view to legislation and I gavethem much information to start on. I wasextremely loath to take this step as we hadenough burdens to carry without all dis-co u r a gin g f i l t h su ch e xp o su r e e n-tailed...There was some doubt as to theconstitutionality of the Federal control ofthe stock exchange...But when a repre-

sentative government becomes angered, itwill burn down the barn to get a rat out ofit."

A lthough H oover was defeated byRoosevelt in November 1932, credit for theestablishment of the S.E.C. does not solelylie with Roosevelt. The birth of the S.E.C.actually originated with the witch hunts of1932.

The S.E.C. still holds broad powers overthe exchanges and indeed many laws whichit enforces such as disclosure and financialstatements from public companies havebeen a great service in preventing some ofthe dishonesty that took place in bogusstock offerings and outright forgery ofstock. But to burn down the barn to get toone rat is not the proper action of a freesociety. One does not permit strip searchesof people walking down the street in orderto catch a suspected shoplifter. Protectionagainst such activity is at least our supposedconstitutional right but when governmentbecomes enraged, you can’t count on themto come to your aid.

It is hard to say whether or not theseproceedings had a lot to do with the drasticdecline in volume on the stock exchanges.All that can be surmised is that there wasperhaps some hesitancy to participate sincethe Senate appeared to have the power tocall in anyone who had bought or sold ashare at some point in time.

One thing was certain; the short interestshad dwindled significantly. At the end ofMay, the market had dropped to a newrecord low, well under those establishedduring previous panics. As the market fellto 46.71 on May 28, volume was a mere675,000 shares. But on Monday, May 31,1932, the market fell to 44.72 and volumejumped back up to 1.4 million shares for the

day. This was still a far cry from the 10million share days of November 1929 or the5 million share days during the recovery ofthe first quarter in 1930.

May had also brought the collapse of theJapanese price supports for the silk market.Seven thousand tons of silk had overhungthe National Raw Silk Exchange. The Japa-nese had set up a price support system simi-lar to the U.S. Farm Board program, whichbought up excess supplies at fixed prices.Japan finally gave up the program and soldthe entire lot of silk to E. Gerli & Co. ofManhattan for $16 million. In return, Ja-pan agreed that they would in the futureattempt to support silk by encouraginglower production rather than buying up ex-cess production at fixed inflated prices.The price of silk on the New York Exchangewas $178 a bale and the deal was struck at$150. Most silk dealers felt rather bullishonce this supply was out of the way. E.Gerli & Co. proposed to sell the silkthrough its distribution network rather thandumping it on the exchange itself.

The steel industry was in shambles, turn-ing in disastrous losses. The President ofBethlehem Steel, Eugene Gifford Grace,made a public statement about the situationin early May. "I cannot understand the in-activity of our labour friends who have notonly failed to demand new laws protectingAmerican manufacturers, but have not in-sisted upon the enforcement of existinglaws." European steel manufacturers weredumping steel in U.S. markets for a loss,driving prices down even further. AlthoughBethlehem did pay a regular $1.75 dividendon its preferred stock, bringing the yield to20%, the common share dividend was omit-ted and most assumed that by the end of thenext quarter, Bethlehem would most likelyomit even its preferred dividend.

U.S. Steel announced that another wagecut would be imposed from the Presidenton down. Wages had already been cut 10%to 15% in August 1931, then 10% in Octo-ber and the new cut which was proposed inMay 1932 was an additional 15%. Thisbrought the average wage down 23.5%.

May brought troubles in other metalsmarkets as well. The tin crisis of 1932 cameabout when the international Tin Cartelwas forced to announce that productionwould be stopped entirely during June andJuly. The Cartel was comprised of MalayStates, Bolivia, Dutch East Indies and Ni-geria. They further announced that whenproduction resumed during August, theyintended to gear back up to only 40% ofcapacity.

Another statistical survey was releasedduring May of 1932. This was a stock surveyconducted by R.G. Dun & Co., which laterwould merge with Bradstreet. The surveycentered its focus upon the ownership ofsecurities in 1932. Dun found that over thepast two years, the number of actual stock-holders in the 346 company survey in-creased by 41.5% which stood at 5,848,000.The number of preferred stockholders hadincreased by only .3%. In a survey of bonds,it was found that ownership had actuallydeclined by 3.8%.

Dun’s survey turned up one interestingpoint. While stocks were purchased onmargin, traditionally the stock remained inthe name of the brokerage house. This sur-vey at the very least demonstrated thatmore people were buying stocks outrightrather than on margin.

It also suggested that small investors’ in-equities still existed and, in fact, perhaps itwas the big players and the professionalswho were now out of the entire affair.

Dow Jones Industrials Daily June 1932

60132 60432 60832 61132 61532 61832 62232 62532 62932

52

51

50

49

48

47

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43

42

Dow Jones Railroads Daily June 1932

60132 60432 60832 61132 61532 61832 62232 62532 62932

19

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13

As June entered the scene, the Senatehearing continued to hit the press detailingGray’s nasty disposition. He come off asthe type of guy who would turn in his ownmother if he thought it would gain him thePresidency.

The Dow Jones Industrials continued tofall. But during the first few days of June,the market rallied from 44 back to 51. Vol-ume picked up significantly, reaching 1.8million shares for three days in a row. Thesecond week the market again fell back to44.45. Volume averaged 900,000 shares perday.

The third week in June saw the marketrally back reaching a new high for themonth testing 51.43. Volume declined thatweek to 568,000 on Monday, moving up to756,000 on Tuesday. On Wednesday, theday of the high for the month volumereached 1.1 million shares. Distinctly, vol-ume began to rise on up days, more so thanon down days.

During the fourth week in June, the mar-ket fell back to 44.31 and volume declinedto as low as 310,000 to a maximum of773,000 shares on any given day that week.As June came into the final week of the27th, volume remained at the 650,000 aver-age level as the market dropped to newlows, testing 42.31 on Tuesday, June 28.June closed the month at 42.84.

What had prompted the early June risewas news that Congress had killed the Sol-dier’s Bonus Bill. Oddly enough, sentimentbegan to invert the relationship of govern-ment actions to the market. At first, gov-ernment programs to increase spendingwere looked upon by the market as beingbullish. Fresh capital would enter the econ-omy, people would buy goods, of course;

thus earnings would rise and along withthem stocks. But as we approach the low in1932, the fundamentalists were looking atthe events completely in the opposite direc-tion.

The Federal budgets had turned into defi-cits. Now all of a sudden, raising taxes andkilling spending were deemed to be bullishfor the market. Why the sudden change? Itwas apparent that Hoover had establishedmany various programs to institute spend-ing which would in turn create jobs. But asbillions were spent, no appreciable effectcould be witnessed by the market. Pricesmerely continued to decline. There is nologic for the sudden change in fundamentalanalysis. At the peak there was no federaldeficit. But deficits began only to occur inresponse to the depression. So now was thebottom in the market caused by the deficitwhich had just begun to manifest itself? Itseems highly unlikely that this would be areason why the market should decline orfall at this point in the game. Nonetheless,Congress’ swift thrust to kill the Soldier’sBonus Bill was deemed to be the most bull-ish aspect in the market during early June.

However, the stock market enthusiastquickly turned bearish on news that wheatand cotton began to break. Some claimedthat the market dropped because PresidentHoover and Vice President Curtis wererenominated during the June Republicanconvention for the upcoming elections inNovember.

On June 3, 1932, there was another bullishpiece of news. The banks had remained ata distance from the collapsing bond market.But the banks had publicly stated that aFederal balanced budget would in theiropinions send cash diving back into the fi-nancial arena. They announced that theywere forming the American Securities in-

vesting Corp. in which 20 Manhattan banksproposed to dump in $100 million. Thebanks announced that this was no pool tostabilize prices and then fold up quietly,slipping out of sight and out of mind. This,they claimed, would be an ongoing com-pany which would buy bonds to make aprofit.

Upon this news, many people began tofeel that the market had bottomed. Indeed,Time magazine stated on June 13: "WhileA.S.I.C. was expected to concentrate onfirst-class bonds, all values rebounded lastweek on the psychology that at last firmbottom had been found." The venture wasonce again put together by J.P. Morgan &Co., and Mr. Lamont took up the positionof President while George Whitney as-sumed the role of Chairman.

In Europe, concerns of the deficit in theUnited States sparked heavy withdrawals of

gold on the part of Europe. Within the firstten days in June, $152 million in gold bul-lion had been withdrawn. Europe scram-bled for gold even though most of hernations had abandoned the gold standard.

On June 6, 1932, President Hoover signedinto law the new Revenue Act which in-creased income taxes and corporation taxesalong with a variety of excise taxes. Themarket responded favorably, believing thathigher taxes would wipe out the deficit.

On June 10, 1932, cotton fell sharply tofive cents a pound. This made the headlinesas it broke the previous record low of 5 5/16cents which had been established on thecash markets back on November 12, 1898.The very next day, the July cotton on thefutures exchange fell to 4.91 cents, breakingits previous record low on futures estab-lished on November 4, 1898 at 4.94 cents.

U.S. Fiscal Budgets in Millionsin

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ions

of d

olla

rsSource: Office of Management & Budget

1920 1922 1924 1926 1928 1930 1932 1934

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On June 14, 1932, France withdrew herlast gold which was held on deposit at theNew York Federal Reserve. France wasseemingly discontent to leave even a frac-tion of a gram on U.S. soil.

But the market began to turn lower as onJune 15, the House passed the Patman Billwhich called for the immediate cash pay-ment of the Soldier’s Bonus. This coupledwith a large U.S. Treasury offering of $750million in securities, dampened the spiritsand hopes for a balanced budget.

On June 16 in Switzerland, a group ofseven nations met and finally agreed atLauzanne to reduce the German repara-tions payments from $64 billion to a morerealistic figure of $712 million.

But on June 17, 1932, the Soldier’s issuecame to a vote in the Senate. The Senate

voted against the bill and it died on the floorthat day.

On June 22, 1932, Hoover proposed ageneral disarmament conference to be heldin Geneva. Hoover called for a one-thirdreduction in all land, sea and air forces. Hehoped that this measure would help notonly to reduce the potential for further warbut to reduce the arms race in Europe.

On June 24, 1932, the Federal Reservelowered the discount rate from 3% to 2.5%.But the market barely even noticed asstocks continued their decline into July.

On June 28, 1932, rubber fell and madeits final low for the depression and the bearmarket. It tested the 2.53 cent level.

On June 30, 1932, the Bank of Englandcut its discount rate from 2.5% to 2% which

U.S. National Debt in Billionsin

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ions

of d

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rs

1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940

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30

25

20

15

10

5

0

Chicago Daily OatsC

ents

June 3, 1932 - August 31, 1932

11-Jun 21-Jun 01-Jul 11-Jul 21-Jul 31-Jul 10-Aug 20-Aug 30-Aug

23

22

21

20

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Chicago Daily Rye

Cen

ts

June 3, 1932 - August 31, 1932


36

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New York Daily Silver

Date: 1861 - 1932

Cen

tsJune 3, 1932 - August 31, 1932


30

29.5

29

28.5

28

27.5

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26.5

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Chicago Daily Corn

Cen

ts

June 3, 1932 - August 31, 1932


36

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32

31

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was the lowest rate of interest in Britainsince 1897.

As July entered, bringing with it the thirdquarter, tagging along was the final low forthis devastating bear market. At last it hadarrived, disguised as just any other normalday on the calendar. Would this day holdsome special meaning? What had distin-guished this day from another? Why July?Why now?

As July opened, the total value of stockslisted on the New York Stock Exchange haddeclined to their lowest point, $15.6 billion,which was a far cry from where they hadonce stood following Labor Day in 1929.July 1 had opened down slightly, reaching alow quite quickly at 42.64 on the Dow JonesIndustrials. As the day progressed, themarket managed to rally back to 44.63 clos-ing the day near the high at 44.39. That wasit. The market would close for the Fourth

of July weekend. Congress had adjournedas well and everyone had the holiday tothink things over.

By a strange coincidence, holidaysseemed to play some sort of invisible rolein providing turning points for markets.The peak in 1929 came right after a holidayand then the market abruptly turned in theopposite direction. Once again, the longthree-day weekend had some sort ofstrange and mysterious effect. For whentraders returned, it became a differentgame altogether.

The Fourth of July had fallen on a Mondaythat year, so traders had another short five-day session ahead of them. The marketopened a little stronger on Tuesday andmoved upward to test out the overheadresistance. That didn’t take very long andthe high of the day was quickly formed at44.63. From there the market fell to 42.64,

Chicago Daily WheatC

ents

June 3, 1932 - August 31, 1932


57

56

55

54

53

52

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49

48

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46

45

44

Dow Jones Industrials Daily July 1932

70132 70532 70832 71232 71532 71932 72232 72632 72932

55

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53

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Dow Jones Railroads Daily July 1932

70132 70532 70832 71232 71532 71932 72232 72632 72932

23

22

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rallying back to nearly the midpoint andclosing at 42.47. Volume was not especiallysignificant, registering at 613,000 shares forthe day.

On Wednesday, July 6, the market fell totest support, dropping as low as 42.31 andmatching the previous record low whichhad been established during June. Themarket bounced rather quickly from thatsupport level and reached as high as 44.50intra-day before closing at 44.08.

Then on Thursday, July 7, the marketopened near the unchanged level andmoved up trying to get through resistancebut failed. The high of the day was formedat 44.26. From there the selling pressurebegan to build and the industrials fell to anew record low, pushing through the Junesupport area. This time the low formed at41.63 and the market closed at 41.81.

The feeling most traders left with that daywas one of bearishness. The consensus waslooking for a test of 38 or at least 40. Afterall, the closing was under 42 which didn’tspeak well for support. Nonetheless, as Fri-day rolled around, the market pushedlower, dropping to 40.56. It rallied back to42.61 but fell for the close and settled at41.22, which was even lower than the pre-vious record low of Thursday.

It was that Friday, July 8, 1932 which hadwon the special attention of the marketgods. That was the lowest close as well asthe lowest intra-day price this bear markethad dealt. Volume was not especially out ofline, merely pointing a figure at 720,000shares which had changed hands. In fact,volume on Thursday had been greater,coming in at 784,000 shares.

Some have tried to look back to find adefinitive reason why the market bottomed

that week. But there was not much newsthat was shocking. On July 2, Franklin D.Roosevelt was nominated at the Demo-cratic National Convention, but this was nogreat surprise. On July 5, Hoover hadauthorized that another 45 million bushelsof wheat and 500,000 bales of cotton begiven to the American Red Cross from theFederal Farm Board. Call money droppedto 2% for the first time since October 1931so you couldn’t blame the final decline on amoney squeeze. But there was nothing ofmajor significance other than those threeevents that week.

On Monday, July 11, the market at-tempted to test the support areas onceagain. Indeed, many still believed that themarket was going to move lower. The DowJones Industrials fell to 40.92 that day butthen suddenly, they rallied back to 43.03,closing at 42.99. Volume was not excep-tional, registering only 597,000 shares thatday. For the balance of the week, volumebegan to rise. Tuesday posted 700,000;Wednesday, 980,000; Thursday, 999,000;Friday, 807,000; and Saturday, an impres-sive 350,000 shares changed hands. Themarket essentially had traded between42.35, reaching 45.98 on Saturday and clos-ing near the high that day.

The following week of July 18, volumecontinued to increase with Friday posting1.4 million shares. Volume hadn’t ex-ceeded the million mark on a daily basis forfive weeks. The low for the week was 43.53and the high came on Friday at 48.31. On apercentage basis, 8 points from the low wasnearly a 20% rally.

The rally was being attributed to variousthings depending upon which newspaperyou read. Some talked of noticeable for-eign buying, others focused upon Hoover’ssigning of the $2.1 billion unemployment

and farm relief bill of July 21. Some re-marked that commodities were improving.Coffee was rising over an embargo againstBrazil and talk of revolution in that country,but lead dropped to its final low at 2.65cents on July 18. Still others pointed to theinterstate Commerce Commission’s ap-proval for the merger of four eastern rail-road companies. Still others talked of theFederal Home Loan Bank Bill, which cre-ated the system for guaranteeing mortgagessigned by Hoover on July 22.

Perhaps one could make a case for eachof those fundamentals. However, Hooverhad instituted many programs and rightfrom the beginning he took aggressive ac-tion to raise public spending. The truth ofthe matter is that the market began to turnlargely upon a psychological explanation.Enough was enough!

During July of 1932, the most daringCommunist insurrection took place inWash ington . Some 11,000 ve te ransmarched on Washington, demanding im-mediate cash payment of the soldier’s bo-nus instead of spreading it out over severalyears. The mob was further enraged byseveral Democratic Congressmen who ad-dressed the mob criticizing Hoover’s oppo-sition. The mob turned violent yet Hoover,unaware that it was actually Communist-backed, maintained his patience until lateSeptember when troops were called out.This was certainly bearish news at the time,yet it had little effect upon the market.

As the final week in July opened, themarket gapped higher. The low of the daywas quickly posted at 48.01 for all to see.The market continued to rally, reaching50.23 and closing at 49.78 with volume of1.5 million shares. Volume continued toincrease steadily. On Tuesday, it reached

1.5 million; Wednesday, 1.7 million; Thurs-day, 2.7 million; and Friday, 2.1 millionshares. There had not been a 2 millionshare day since March of 1932 and as far asback-to-back 2 million share days, well thathadn’t been seen since February when themarket was charging off to form the highsof the year.

July had posted so little volume during thebeginning of the month that total volumewas merely 23 million shares, a bare frac-tion more than June. But as the marketcontinued to soar, volume intensified. Au-gust posted 82.6 million shares, the highestmonthly volume since 1930. Septemberturned a respectable volume of 67.3 mil-lion, but going into the elections, volumedropped off again and by January 1933, ithad declined to record lows of 18.7 millionshares which would be the lowest point onvolume for the entire Great Depression.But to give you a hint of how nervous the

market remained, in May 1933, volumejumped to 104.2 million shares.

August had opened perhaps only 1 pointfrom what would become the low for theentire month. From there the rally contin-ued. The Dow Jones Industrials reached ahigh of 77.01 on August 29 and closed themonth at 73.16. The rails, which had alsobottomed on July 8 at 13.16, had rallied upto 37.94, far outpacing the industrialslargely on the approval of the railroadmerger. The bonds, however, had actuallybottomed on June 1, one month in advanceof the common shares. From the June lowof 65.78, the bonds reached their peak inAugust at 83.26.

The headlines during August as the mar-ket soared were not necessarily filled withbuoyant, bullish news. On August 3, theSecretary of the Treasury resigned. On the8th, the big news was the market reaching

Daily Volume on NYSEin

thou

sand

sMay 1, 1932 - September 30, 1932

50232 52532 61732 71132 80332 82632 91932

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5.5 million shares in volume, the "largestsince October 1930!" On August 16, theNational Farmers’ Holiday Association inDes Moines adopted a resolution to hold allfarm products until prices rose above pro-duction costs. This was seen as bullish forthe agricultural commodities so the stockjockeys joined in and claimed it was bullishfor equities. On August 23, the papersturned their attention to the bond marketsince it tested 83.26 on the Dow Jones In-dex. But as usual, when it makes the frontpage the trend is over and that was theprecise high for the balance of the year.

On August 23, tire shipments in Juneregistered the highest on record, up 86.1%over June 1931. But the bearish note wasthat unusually large orders came flowing indue to the anticipation of the new excisetaxes which were about to be imposed.

Steel ingot production was reported tohave declined even further, nothing bullishthere. Cotton soared and reached its highfor the year at 9.2 cents on August 27.Banker’s acceptances had declined by $400million, reaching their lowest point for thedepression in August at $681.4 million out-standing. In general, the gossip was themain market mover that month. That toldtales of anticipated trade revival.

As the summer was approaching its end,Labor Day had arrived on September 5.The industrials exceeded the August high,reaching 79.22 on September 3 just as themarket was preparing for the holiday. Thensure enough, when the market reopened onTuesday, September 6, the industrialsreached their peak at 80.36 and began adecline into the end of the month, fallingback to 65.06 on a closing basis. The railshad continued into Thursday, September 8,reaching 40.85 and then falling back to

Dow Jones Bond Index

Source: Dow Jones

Daily Closing Activity Sept - Dec 1931

Sep Oct Nov Dec

100

95

90

85

80

75

70

65

60

29.71. The bonds had peaked on Tuesday,August 23, well in advance of Labor Day.

The Fourth of July-Labor Day rally hadsparked a lot of confidence that summer.Many people believed that the worst wasover and it was back to happy-days-are-here- again. But from the Labor Day highs,the market fell rather sharply. The WallStreet Journal commented in its review ofthe month as follows: "In September thestock market showed reactionary tenden-cies which commenced around the eighthof the month and continued during the restof the period with several breaks. A varietyof reasons was responsible for this move-ment. The upward swing which com-menced in July had been carried too highand there was the necessity of establishinga balance; then too prices of cotton andwheat again turned downward which less-ened confidence considerably and finallythe expected trade revival did not material-

ize. Polit ical considerat ions likewiseproved a disturbing element. In Maine theDemocrats succeeded in gaining the Gov-ernorship and several Congressional seatswhich was construed to mean a Democraticvictory in the fall."

Curiously enough, much apparently stillrested upon the relationship between com-modities and stocks. The fact that the com-modities had never risen to new highs afterthe peak in 1919-20 did not prevent thestock market from scoring substantial newhighs in 1929. But you will recall that in thepre-1928 years we found that the disbeliev-ers of the bull market and the economicboom had based a large part of their bear-ishness upon the fact that commodities hadremained depressed. Many analysts had se-riously doubted a bull market could unfoldunless commodities participated. Here atthe bottom in 1932 we find commoditiesserving as a crutch for the stock market

HOG PRICES

Date

Per

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hel

(per Pound)

1879 1889 1899 1909 1919 1929

24

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once again. The fact that the commoditiesby and large declined between 1920 and1932 while stocks rallied into 1929 beforefalling to new lows for this century did littleto change the traditional perspective ofcommodities and stocks moving in har-mony.

From the Labor Day highs of 1932, theindustrials continued to decline gradually,reaching their lowest point in February1933 just prior to the closing of the ex-change due to the Banking Crisis. But fromthat low, the market never looked back atthe 50 level again. It continued a broad yetchoppy rally which eventually saw the 100level again before the end of 1933. Therally would continue into 1937.

What caused the abrupt rally which dou-bled the market between the July low andthe Labor Day high? The Wall Street Jour-nal attributed the rally to a cessation of goldexports, rumors of foreign buying, a generalrise in commodity prices and the approvalof the railroad merger. The New YorkTimes basically stated that the obvious an-swer to the rally was that the market wasseverely oversold and added to this was ageneral rise in commodity prices.

Perhaps in part some of the first stocks torise were the "wet" stocks as Wall Streetcalled them. In July, they began to rally asrepeal of prohibition was bantered about.Wall Street had searched for companiesthat would benefit the most, and the listincluded Owen-Illinois Glass Co., NationalDistillers Products, American CommercialAlcohol, Crown Cork & Seal, and Park &Tilford. The "wet" stocks were the leadersgetting the edge on the others by one week.Perhaps that was what Wall Street was wait-ing for all the time, a good old fashionedlegal beer.

In the June 27 edition of Time magazine,a statement made by General Charles G.Dawes, the President of the ReconstructionFinance Corporation was quoted. Thestatement given in Chicago read: "I believethat we have reached the turning point inthe Depression...It is the smaller businessenterprises with low overhead expenseswhich seem to be showing improvement.But in time the larger ones must necessarilyfollow...I would attribute much more im-portance to the increase in electric powerconsumption in the country during the lasttwo weeks than to stock or bond quota-tions." Time appropriately went on tostate..."Only factors tending to discredit thisDawesian cheer last week were his pastrecord and the still-sagging index of busi-ness conditions. In general Dawes’ recordare the following utterances: ‘People do notrealize that conditions are gradually im-proving,’ June 5, 1930...‘It (the morato-rium) is an augury of improved financialconditions,’ June 20, 1931."

There is no doubt that Dawes, like 99.9%of most people, was attempting to applylogical reason to why the business condi-tions should turn. The problem was that ifyou make such statements all the time,sooner or later you’re gonna be right. Thiswas published just one week prior to theturn in the stock market.

But the old adage that when a marketdeclines on bullish news, it must mean thatit’s a bear market and, conversely, when amarket rallies on bearish news, it must be abull market, has some validity.

Trying to search for decisive bullish newswas difficult. In July, Colgate- PalmolivePeet Co. cut its dividend from $2.50 to $1.This news prior to July was extremely bear-ish. Yet it did not prevent this stock fromrallying sharply into August. In late July, it

was reported that steel capacity utilizationhad fallen to 12%. Clearly a decisive bear-ish piece of evidence.

In the July 25, 1932 edition of Time maga-zine, it was reported that First NationalBank of Boston would not have set aboutraising the money last week had they notexpected higher interest rates in theautumn." Indeed, interest rates, using thediscount rate at the Fed, had actually bot-tomed back in 1931. From the June low onthe discount rate, the trend was clearly anddecisively higher. The stock market hadbottomed with the secondary low in interestrates which had taken place during 1932.Oddly enough, as rates moved higher so didthe stock market. One could not make acase for the market bottoming becauserates had risen. The opposite was in fact thecase.

Throughout July and August the Kreuger/Swedish Match Scandal continued to domi-nate much of the press space. The list ofcasualties continued to widen as the debtshe left behind after his suicide continued tomount reaching $225 million. Banks werechasing banks and everyone was scramblingfor claims where several parties had beenpromised the same collateral. Even banksin New York were involved, yet this bearishnews did not affect the rally.

In the August 8, 1932 edition of Timemagazine the fo llowing commentarygraced its business page which for so longhad lacked much news about the marketitself. The article reported:

"People who believe that pessimism hasbeen the chief drag against business feltbetter last week. The mercury in the sensi-tive thermometer of sentiment went shoot-ing up. Warmest of rays was a sensational



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rally in stock prices. What had started threeweeks prior as a slow creeping advance sud-denly became a running leaping market. Inpercentages, even the famed Moratoriummarket with its 28.9% gain in 25 days wasoutdistanced. Railroad shares jumped awhopping 58%, utilities 38%, industrials37% in 22 days, putting on millions of dol-lars of weight, much goodwill. Brokers bel-lowed with joy at the windfall of a 2.8million share day.

"Observers were inclined to think the rallystarted through belated recognition of thefollowing fundamentally bullish items: 1) the Lausanne Agreement. 2) the cessation of gold withdrawals and

foreign buying of U.S. securities. 3) the ICC merger decision. 4) expansion of credit."

Time magazine went on to tout the rise incommodities. In keeping with the rest of

the consensus, Time surmised that a rise incommodities would help many companiesand in turn firm up earnings. The rally incommodities was the single biggest jump inacross the board commodities since 1925.

The commodity market did literally soar.Sugar, metals, cocoa had all reboundedback to early year levels. Wheat jumped up4 cents. Although some commodities hadmade periodic sharp rallies such as wheatover the Japanese war scare, this was thefirst broad-based commodities rally. Butthe nagging question remained. If the stockmarket rallied because the commoditiestook off, then what made the commoditiesrally? Stocks?

The truth of the matter is this. Althoughcommodities rallied quite sharply due tovarious rumors involving Russia, wheat fellto its lowest historic point following theelections in November. At the same time

Net Capital Flows in U.S.in

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1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937

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call money reached an historic low of 1%,and time loans (60 days) went as low as1/2% compared to 3.5% in November 1931.Therefore, the market observers may haveattributed the rally to the commodities, butthe commodities eventually fell to new lowsin November. The stock market held theJuly lows and never violated the 50 areaagain. The argument that stocks rallied be-cause commodities had finally turned isn’tlogical since when commodities fell to newlows, stocks supported.

In the August 15, 1932 edition of Timemagazine, the following comment upon therally in the stock market appeared:

"Cornered bears, fat with three year’sprofits, fought madly to cover their shortpositions. Badly squeezed, they howledloud and long. Once the rally was well un-der way their frantic buying helped poolmanagers to push stocks up and up. Out-

standing leader of the advance was Ameri-can Telephone and Telegraph which soaredfrom $70.25 a share to $114.25. U.S. Steelmore than doubled its Depression low of$21.25; many stocks tripled in value. Largeorders from European money centersswelled the volume of U.S. buying and thedollar rose smartly."

Here we find another reference to largeEuropean orders flooding the market andthe dollar rising. Short covering was cer-tainly noted, but keep in mind that with thewitch hunt still going on and the publicationof who was short, the actual short interesthad declined significantly. Most of the buy-ing seemed to be real and flowed fromEurope into the States, pushing the dollarhigher as foreign currencies were beingconverted into dollars to facilitate U.S. in-vestment.

U.S. Steel Production as % of CapacityP

erce

ntag

e of

Cap

acity

Util

izat

ion

monthly average basis

1928 1929 1930 1931 1932 1933 1934

110

100

90

80

70

60

50

40

30

20

10

0

Note that Time magazine reported on thesharp advance U.S. Steel had made. Hereis a comment on U.S. Steel published byTime magazine on the 8th of August. Itread as follows:

"While newshawks who had been waitingabout an hour held a mock directors meet-ing, irreverent and bawdy, the solemn di-rectors of U nited States Stee l Corp.pondered the worst quarterly earningsstatements in the company’s history. Theyfinally decided to vote the regular preferreddividend, but in explaining the action to thepress, Chairman Myron C. Taylor made itabundantly clear that ‘improvement inbusiness and net earnings must in futuredetermine dividend action on the preferredstock.’ Because a very similar statement hadpresaged omission of the common divi-dend, because steel operations last weekwere but 16.5% of capacity whereas theymust be 35% to 40% to earn the preferred

dividend, Wall Street assumed that whenthe Board meets October 25, two weeksbefore Election Day, the preferred divi-dend will be passed for the first time in thecompany’s history."

Here we have definitive news, which hadfueled the bear market into its July low.News of dividends being cut or omitted waswhat the bears fed on for a long time. Yetwhy would U.S. Steel be one of the leadersin the rally when in the very midst of it, WallStreet anticipated that U.S. Steel wouldeliminate its preferred dividend in Octo-ber? Again we find that the prior analysiswhich had been bearish seems to have beenignored during the rally.

In Time magazine, the following report onthe market contains some interesting com-mentary on the rally as well. Publicationdate was August 22, 1932.

"The great pot of the New York StockExchange continued to boil hotly most oflast week, but in the last two days the fire ofbullish enthusiasm cooled, stock prices lostmore than one-fourth of their month longrise. Speculators for the advance amazed attheir swift-gotten gains, suddenly rushed tocash in. At the rally’s peak, railroad sharesstood 127% above their bear market lows,utilities 83%, industrials 74%. Stocks as awhole had climbed up the opposite side ofthe valley to a point abreast their prices lastApril. Market observers who had beenwagging warning fingers at the almost per-pendicular ascent of the last fortnight,smiled knowingly. Having predicted a sharptechnical reaction, they were not surprisedthat it was all the sharper for being so longdelayed."

The first portion of this commentarystates that many observers were calling fora reaction. Of course that is always the case

after such a rally. But the 25% correctionfrom the August high was just that. Thesentiment seemed to suggest that the mar-ket had peaked and it would not continuein its correction. But to the surprise of all,the market rallied and outdid the high men-tioned in this report. Nonetheless, the com-mentary that followed is quite interesting.Time went on to report:

"Among the first to start the harvest wereshrewd foreign buyers who were reportedto have entered the market at its verytrough. Volume of trading swelled to23,595,000 shares for the week, largest inmore than two years. Entering this weekboth stock and commodity markets stead-ied with trading at a reduced pace.

"In the last days of the wild uprush, rumorsof pools flew thick and fast. Farm equip-ment shares were bulled vigorously on thereports (all denied) that Russia was about

BRITISH POUNDU

.S. $

PE

R B

RIT

ISH

PO

UN

DMONTHLY: 1932


3.8

3.7

3.6

3.5

3.4

3.3

3.2

3.1

to float a bond issue in the U.S., wouldpresumably use the funds to purchase farmmachinery. From the June low of $16.75,J.I. Case shares (plows, harvesters) werewhirled up to $62.50. In the two-day reac-tion they slumped to $46. If the Russianbond story was pool inspired, pool manag-ers must have been amazed to see the oldRussian Imperial issue, which has longslumbered on the Curb at less than 1 centon the dollar, suddenly aroused and run upto 3.25 cents on the dollar."

In London, the noted publication entitledthe Economist, carried this comment on theAmerican situation in August:

"It would be rash to predict that Americais within sight of general economic recov-ery, for the forces bearing down are almostas ineluctable as those which... forced herto the peak of prosperity. Nevertheless,

there is reason to think the Giant of theWest has passed the crisis in his sickness."

The American press had also commentedon reports from brokers who noted in-creased "foreign buying." Did overseasbuying contribute to the turn in the market?If so, why were European investors movedto suddenly buy U.S. equities once again?To solve these riddles, we must look at theforeign perspective and the influence offoreign exchange at that time.

The European situation was still greatlyvaried from one nation to another. Thecontrast was perhaps most noted betweenBritain and Germany. In Britain, contraryto wide belief, it had been the NationalGovernment which chose to abandon thegold standard back in 1931 and not theLabour Government. Despite the warn-ings that everything would collapse, Britainhad finally made a smart move. The whole-

British Pound


U.S

. dol

lar

per

Brit

ish

poun

dMONTHLY CLOSINGS: 1900 - 1940

1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939

5.2 5.1 5 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 4.1 4 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1

sale price index of the Economist initiallyrose 4 points following the devaluation, butfrom its peak in October 1931, it declinedrather steadily into June of 1932 where ithad reached its low for the depression andbegan to rise in July. Britain had not put uptrade barriers to agricultural products andas a result it benefited greatly from importsin that sector, which had continued to de-cline in price.

The pound itself initially dropped, closingat $3.90 in September of 1931. From thereit steadily declined against the dollar,reaching on initial low at $3.46 in January1932. The dollar sharply declined intoMarch coinciding with the stock marketbreak, and the pound rose to $3.77. Thepound began to decline steadily from thatMarch high and by July it had fallen to$3.50. Buying from Britain was sparkedlargely due to the declining wholesaleprices and fear that the pound would drift

much lower. Therefore, European buyingof U.S. securities which was reported frommany sources in July, was largely driven bya hedge against a fear of further devaluationof the European currencies. They werecorrect in that respect because the pounddeclined into November, dropping to $3.15.

The general consensus of opinion in Brit-ain was largely propelled by the abandoningof the gold standard and propaganda by theLabour Party that Britain would be headedtoward another Great Depression as wasexperienced during 1922. The opinion ofthe dollar changed dramatically when theDemocratic victory came in November.

Much of the 1932 Presidential campaignhad centered around the gold standard andthe tendency of Roosevelt toward a dollardevaluation. Even though he had at firstsupported this idea, he changed his opiniongoing into the election. The Europeans

Germany - GNP & Industrial Production


annu

al %

rat

e of

cha

nge


1926 1927 1928 1929 1930 1931 1932

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

Gross Natl Product Indstrl Production

were sure that Hoover would win and thatthe American people would see throughRoosevelt’s continual vacillation on issuesfrom one speech to the next. His attack ofthe tariffs was merely another example.Whe n fa rme rs be came en rage d, hechanged his position to state that he wouldnot lift the tariffs against agricultural prod-ucts. Perhaps it takes a party outside thesituation to make a less biased analysis ofthe situation.

Nonetheless, the Europeans began to sellthe dollar dramatically when Rooseveltwon the election. November 1932 was thelowest point for the pound at $3.15. Withinone year, by November 1933, the pound hadrisen to $5.17, a completely new recordhigh, out of fear of Roosevelt’s policies.

In respect to the foreign buying of U.S.securities in July 1932, it was clear that thesentiments in Britain at the time were bear-ish on the pound and the consensus of opin-ion was still looking much lower. For thatreason, many astute Europeans were buy-ing the dollar-based investments. Thiscoupled with the general press, whichseemed to express the opinion that the U.S.economy was turning around, helped makethose U.S. common shares look attractive.

The situation in Germany was notablydifferent. The policies of Bruning hadforced upon Germany a severe deflation,which by the fall of 1932 had cut the stand-ard of living by nearly 50%. Bruning hadmaintained high protective tariffs uponfood imports largely at the request of thePrussian landowners. As a result, wheatwas costing the German consumer twice asmuch as in the United States. AlthoughBruning had been driven from office, Com-munistic and Hitlerist groups were gainingmuch popularity. These serious deflation-ary policies led to Hitler’s victory in 1932.

Again, capital’s motive was toward U.S. in-vestment largely for political concerns.

If we refer back to the Wall Street Jour-nal’s comment of September 1932 that thedecline from the Labor Day high was in partcreated by the Democratic prospects of avictory in November, then we should con-sider the effects of the campaign upon themarket. The general consensus in Europe,as I stated earlier, leaned toward a Repub-lican victory in the fall. Much of the finan-cial community was also in favor of theHoover ticket. The popular vote, however,swung in favor of the Democrats withoutreal understanding of its implications.

Roosevelt had conducted a campaignbased opon many outright lies and continu-ally tried to assert that the blame for theent ire wor ld depression be longed toHoover. In several addresses he misrepre-sented the situation and claimed that thedepression had begun with Hoover andspread to Europe from his administration.Of course this was completely false becauseit had been clearly established that the de-pression had begun in Europe long beforeit emerged in the States. The entire centralbank conspiracy, which Adolf Miller andHoover tried to prevent in 1925, was evi-dence of that fact. This turned many bank-ers and leaders in the financial districtsagainst Roosevelt. Nonetheless, the unin-formed public at large knew little of theinternational circumstances.


Confusion dominated the world economyas 1933 emerged. Much of the miscon-

ceptions of the Great Depression werepropagated by the campaign of 1932 and thefalse accusations hurled at Hoover byRoosevelt. In every political campaign theparticipating parties usually attack their op-ponents with statements that are less thantrue. One of the dangers to society as awhole resulting from this type of politicalbehavior is the tendency to influence theminds of the populace to such an extent thattheir ideas and concepts become changedand distorted thereby endangering futureeconomic progress.

The Presidential elections of 1932 was byfar the most dramatic influential event fromthe political economic perspective withinthe entire post 1929 era. The blame for theDepression as placed upon the shoulders ofHoover changed and shaped the public per-spective of the political system from thenon. The Republicans were marked as theparty for the rich and the Democratsemerged clad in shining armour as the de-fender of the poor and working class. It wasin fact many of the Democratic statements

during this period which strengthened thecommunistic movement within the UnitedStates. I should point out that the Demo-crats were not outright supporting commu-nism, but their political attacks on theRepublican party as supporting the richwho had speculated forcing the entire worldinto depression with the collapse in thestock market made lovely ammunition forthe communist as well.

In the decades that followed, the infra-structure of the political economy withinthe United States grew ever more closer tothe socialistic ideals which characterizedthe "New Deal" as building society from thebottom up rather than from the top down.Spending programs began to drift towardsocial programs and the very direction ofthe political economy of the United Stateshad been changed from a small less obtru-sive form of government to a highly in-volved government structure. This was inmany ways accompanied by shifting theblame for the Depression on the Republi-can party and the wealthy class within theAmerican society. Despite the fact that this

Dow Jones Industrials - Monthly

Source: Dow Jones

1931 - 1939

1931 1932 1933 1934 1935 1936 1937 1938 1939

200

190

180

170

160

150

140

130

120

110

100

90

80

70

60

50

40


453

was wrong, the populace bought the ideaand was eager to pin the blame on someone.

It was therefore this misguided blame forthe Great Depression upon the stock mar-ket and the Republican party which actuallyaltered the decades that followed. Thethinking process which once drove thestock market higher or lower began to alterand transform into a distinctly differentmethod of fundamental analysis. The in-tentional misdirection of the causes of theGreat Depression would serve as the basisfor the very same errors and problemswhich would return following World War II.Competitive devaluations, trade wars, anti-trust actions, all emerged with an uncannysense of deja vu. Without honestly assess-ing the blame for the Depression on inter-national problems of trade and fiscalirresponsibility, those very same errorswould be made once again.

The accusations which Hoover had madeagainst Roosevelt in regard to his positionon the gold standard were perhaps dis-missed by the Democratic party prior to the

elections, but following them Hoover’swarnings had become crystal clear reality.The massive population within the UnitedStates was largely uninformed of the truecauses of the Depression. They did notgrasp the idea or concepts which were atstake during the elections. As a result,ironically it was the poor and the middleclass who were now about to suffer thelion’s share of the hardships dealt by theworst banking crisis in all modern history.Its causes would stem from the very con-cepts of money and the gold standard itself.The general population did not understandthe full impact of what would be termed"currency inflation" but by the end of 1933there would be few Americans who did notunderstand the role that gold would play inthis new economic tragedy.

The most serious problems resulting fromRoosevelt’s statements began to arise overhis position on currency. He had made sev-eral vague statements in reference to a"managed currency" but distinctly omittedthe word "gold." On the eve before theelections, pressure from many sectors de-


454

manded that Roosevelt clarify his position.He did. He pledged that he would notabandon the gold standard and inferredthat concerns in that respect were not war-ranted.

Upon winning the election, his secret poli-cies immediately began to emerge, castingdevastating doubt upon the future, and ru-mors began to spread like wildfire that adevaluation was in the wind. The Demo-cratic party had long been a symbol of "softmoney." The 1890s were long rememberedas the period of the "Silver Democrats" withWilliam Jennings Bryan’s famous speech of"Thou shalt not crucify mankind upon across of gold." When Hoover chargedRoosevelt with planning to abandon thegold standard during the campaign, SenatorGlass, at Roosevelt’s request, furiously de-nied the allegations.

Nevertheless, following the elections,flood of rumors began to circulate thatRoosevelt was planning a devaluation.These rumors became so widespread thaton January 2, 1933, a distinguished group ofover 30 economists issued a public state-

ment in which they said "the gold standardof present weight and fineness should beunflinchingly maintained. Agitation andexperiments would impair confidence andretard recovery!"

On January 4, 1933, Senators Wheeler,Thomas and Connally all made statementsin the Senate in favour of a devaluation onthat same day in the House, Garner pusheda resolution through in which he called forthe publication of names of all financialinstitutions that had borrowed from the Re-construction Finance Corporation. SeveralDemocrats, including Green, joined theRepublicans in protesting this action.Hoover pleaded against publishing the listfor he feared that a panic would result.

As Hoover feared, the public began toassume that if a bank had borrowed fromthe RFC it must be in trouble. By the endof January 1933, 62 banks on the list wereforced to close their doors, resulting in $70million in losses. On February 18, SenatorRobinson introduced a bill to stop publica-tion, but the measure was defeated. Robin-son pleaded personally with Roosevelt buthe insisted that "everything should be pub-lic." The casualties continued and by theend of February, $200 million was lostthrough banks which had been forced toclose . Cur iously enough, Rooseve ltblocked all efforts to stop the publication ofRFC loans but immediately put a halt tothis practice when he assumed office.

Meanwhile, the rumors of devaluationwere creating a panic in foreign exchangeand a flight from the dollar domestically aswell. Many ran to the bank withdrawinggold coin. It appears that Roosevelt wasfollowing the advice of George F. Warren, aprofessor at Cornell University who con-tended that a devaluation would artificiallycreate a great boom similar to the inflation-


455

ary periods of the Spanish Conquest and thehuge gold and silver discoveries in the U.S.and Australia between 1849-1860. The the-ory was that a devaluation would raiseprices as well as wages naturally, a devalu-ation does raise the prices of goods sincesuch items seek an international level ofvalue among nations

Adolph Miller at the Federal Reserveclaimed that Roosevelt had openly sug-gested the concept of devaluation to a pri-vate gathering of bankers in mid- January1933. Europe was aware of the rumors butwas still baffled by them since their viewwas clear, the dollar was not overvalued.Roosevelt was described in London as aman who "held no economic theory." Nev-ertheless, from the November low of $3.15,the pound jumped to $3.43 by February, an11.25% gain. The smart money in theUnited States was buying foreign exchangewhich the masses were hoarding gold inever increasing quantities in the end, thosewho had bought the foreign exchange prof-ited handsomely. But those who hoardedgold found themselves subject to criminalprosecution if they did not surrender theirgold holdings at the old value of $20 priorto Roosevelt’s devaluation in January 1934,which fixed gold at $35 per ounce.

The situation was becoming intolerable.No one knew what was going on and bankswere besieged by both those who were flee-ing from the dollar as well as from the fearof insolvency caused by the publication ofthe RFC loans. On January 23, the NewYork Times urged Roosevelt to make astatement to confirm the pledge he madethe night before his election not to abandonthe gold standard. The New York Timeswrote:

"It is probable enough that the presentspirit of hesitancy, not only in financial mar-

kets but in general trade, is more or lessinfluenced by lack of such reassurance...innumerous older similar occasions doubtand mistrust prevailed with exceedingly badeffect on financial sentiment, until thePresident-elect took matters into his ownhands and publicly avowed his purposes.This was notably true in the pre-inaugura-tion period of 1885 and 1893, at both ofwhich junctures the maintenance of goldpayments was being discussed uneasily andat both of which Mr. Cleveland stated sopositively and so courageously his ownviews of the general problem as to removeat once all apprehension."

On January 30, 1933 Senator Thomas toldthe Senate:

"I am in favor of cheapening the buyingpower of the American dollar if this can bedone; to the extent that the dollar is cheap-ened, to the same extent will commodityprices be increased."

The rumors were further intensified byHenry Wallace, an announced member of


456

Roosevelt’s forthcoming cabinet, who said:"The smart thing would be to go off the goldstandard a little further than England has."

The same day, the Federal Reserve issueda statement warning of the dangers of de-valuation. The press was besieged by allthese comments and rumors and tried too b t a in a d e fin i t ive co m m e n t fr o mRoosevelt, but failed Foreign banks beganto redeem their dollars for gold, furtherincreasing the drain upon reserves. Thewithdrawal of gold coin from the Treasurywas approaching a crisis level. During thelast 10 days in February, $80 million in goldcoin had been withdrawn and during thefirst four days in March, $200 million hadbeen withdrawn. The pressure upon thebanks had become intolerable.

Throughout early February, many ofRoosevelt’s supporters, who had not knownof his secret policies of devaluation prior tothe election began to make public state-ments against him. Melvin A. Traylor, thewell respected Chicago banker who had

fought Benjamin Strong was originally aRoosevelt supporter. He spoke out, saying"Nothing but a declarat ion from Mr.Roosevelt that there will be no devaluationwill save the situation from a general panic."Bernard Baruch warned the Senate com-mittee that the situation had become the"most serious in history... If you start talkingabout devaluation you would not have anickel’s worth of gold in the Reserve Systemday after tomorrow." And on February 13,the New York Times again called uponRoosevelt to answer these wild rumors.

Roosevelt had left for a cruise and re-turned on the 17th of February. Hooverwrote a letter advising Roosevelt of thesituation. It read as follows:

"A most critical situation has arisen in thecountry of which I feel it is my duty to adviseyou confidentially. I am therefore takingthis course of writing you myself and send-ing it to you through the Secret Service foryour hand direct as obviously its misplace-


457

ment would only feed the fire and increasethe dangers.

"The major difficulty is the state of thepublic mind, for there is a steadily degener-ating confidence in the future which hasreached the height of general alarm. I amconvinced that a very early statement by youupon two or three policies of your Admini-stration would serve to restore confidenceand cause a resumption of the march ofrecovery."

Up to this point in time, all talk was beingconducted through Roosevelt’s closer sup-porters. No word from him would deny orconfirm whether or not these rumors hadany basis in truth. The situation continuedto degenerate on the 18th of February,Senator Glass, who publicly had acceptedthe post of Secretary of the Treasury underRoosevelt, announced that he had refusedthe post because upon meeting with Mr.Roosevelt, the President-elect would notprovide the Senator with an assurance thatthe gold standard would be maintained.This only intensified the situation since

Senator Glass had been a strong Demo-cratic leader in the Senate and the origina-tor of the bill that gave birth to the FederalReserve. All the press from the New YorkTimes on down carried the story.

The New York Times reported on theperspective from London:

"The judgment of financial circles here isthat at no time in the recent economic his-tory of America has there been greaterneed than at present for a flat declarationof a monetary policy by the new Americangovernment. It is believed that if the infla-tion bogy is definitely laid by the new Ad-ministration, the first long step towardrestoring confidence will have been taken."

The perspective from Paris was also re-ported by the New York Times:

"The confusion of mind on Europe’s mar-kets concerning the future tendency of thedollar must be ascribed to lack of informa-tion regarding the definite intentions of thenew American government. A declaration



Rat

e of

Inte

rest

1915 - 1933

1915 1917 1919 1921 1923 1925 1927 1929 1931 1933

7

6

5

4

3

2

1

0


458

by Mr. Roosevelt declaring firm resolutionto maintain a sound currency would have anextremely reassuring effect. So would aplain statement on the economic policywhich he proposes to pursue."

On February 23, 1933, Roosevelt re-sponded to President Hoover’s letter,apologizing for the delay by stating that hehad overlooked it. He gave no reply as tohis forthcoming statement. Hoover at-tempted to use the War Powers Act to pre-vent capital from flowing out of the country,but the Democrats blocked it. He at-tempted to increase the loans to banksthrough the R F C; Senator Couzensblocked it.

The full accounts of the period from anumber of sources including memoirs ofvarious noted individuals as well as newspa-per editorials all attest to the intentionalpolitical motivations of Roosevelt to allowthe situation to reach a panic level so thathe might reap the benefit of appearing asthe hero. His actions resulted in the worstbanking crisis in the history of the United

States, all for his own personal politicalgain. The public’s withdrawal of gold aswell as foreign withdrawals were promotedby fear of his incoming administration. Nu-merous speculators with knowledge of hisdevaluations benefited greatly on foreignexchange speculations. For the averageAmerican who lost his savings through theunnecessary banking panic, there were nowords of consolation.

Nevertheless, we have reviewed howmany blamed the depression prior to Julyupon excessive pessimism. It is said that thestock market is often a leading indicationfor the future of the economy. This hasbeen true over various intervals largely be-cause the movement of any market is basedupon future expectations. Economic ex-pansion takes place when future expecta-tions of business conditions look to beprosperous.

The incidents which took place betweenNovember 1932 and March 1933 wereclearly an anticipation of future uncertaintyand inflationary policies of a President-

Dow Jones Industrials - Monthly

Source: Dow Jones

1932 - 1933

1932 1933

110

100

90

80

70

60

50

40


459

elect. Indeed, much of the excessive de-cline in the stock market and in economicactivity had a lot to do with the motions ofthe time. It was a depression of not merelyprice, but of attitudes and human emotionsas well. This is what made the depressionso "Great."

The stock market had peaked on the holi-day cycle following Labor Day. It fellsharply reaching its lowest close followingthe elections in November. Decemberhovered near the November low and then arally developed on very low volume intoearly January. But as rumors spread duringearly January, the stock market began tofall. The flight from the dollar sparked nu-merous Europeans to dump their holdings,which forced the Dow Jones Industrialsdown from 62 to 50 moving into February1933. Volume dropped to its lowest point inthe history of the collapse during the earlyJanuary rally which was perhaps a warningthat February was going to drop sharply.

Of course, when Roosevelt assumed of-fice on March 4, he declared a bankingmoratorium enacting the War Powers Actwhich he had prevented Hoover from using,claiming that the power had been takenaway with the repeal of that law after WorldWar I. The stock market and the banksremained closed. The stock market re-opened on the 15th of March. The marketopened higher initially near the 62 level butfell back to 56 for the end of the month.Volume increased to 23 million shareswhich was substantial considering it hadonly been open for two weeks.

In April, 1933, Time magazine reportedthe various consensuses of opinions as themarket began to reverse to the upside.

"HOPES. Faith in better business condi-t ions rested chiefly on the followingground:

Reopening of some 13,500 U.S. banks(75%) provided a broad enough credit basefor commercial operations. The closing of

NYSE MONTHLY TRADING VOLUME

Source: Dow Jones

In T

hous

ands

1929 - 1934

1929 1930 1931 1932 1933 1934

150000

140000

130000

120000

110000

100000

90000

80000

70000

60000

50000

40000

30000

20000

10000

0


460

weak banks makes that base much firmerthan before.

Prospective balancing of the U.S. Budgetmeans that the Government’s credit shouldremain absolutely sound.

The Federal Reserve’s gold holdings in-creased $327 million.

"Beer promises new profits not only tobreweries (average brewery stocks rosenearly 50%), but to motor companies(manufacturing delivery trucks), to farmers(who grow barley and hops), to vendors oflabels, bottles, bottle caps, advertising.Ownes-Illinois Glass Co. reported that or-ders for 62 million beer bottles had beenreceived in the last month. Restaurants andhotels look for more profits when they cansell.

"DOUBTS: Businessmen looking aheadsaw, however, these obstacles which mustbe overcome before recovery gets into fullswing.

Healthy though it is to have weak bankscut out of the banking system, if 15% or20% of the banks are liquidated it meansthat depositors will have to pocket losses ofhundreds of millions of dollars. In liquida-tion, National Banks average only about67% payment to depositors, state banksconsiderably less. Furthermore, while theFederal authorities appear to have beenfairly rigorous in weeding out weak banks,there are no doubt cases on non-memberstate banks opened by local authorities whofor political reasons were more lenient thanthey should have been.

It remains to be seen whether the Admini-stration’s efforts will have any effect on re-storing farm prosperity. Unless nature orgovernment succeeds in restricting next

year’s crops, the farm surpluses bid fair tostay.

Many railroads must soon face reorgani-zation.

There will have to be a readjustment ofmany mortgages, urban as well as rural. Lastweek in ever radical North Dakota, Gover-nor Langer ordered the militia to preventforeclosures where sheriffs disregarded hisorders.

The bond and mortgage situations mustbe cleared up for the benefit of life insur-ance companies."

The stock market continued to presshigher but confusion began to increase.Those who were bullish and looking for abalanced budget began to take profits onthe April rally as rumors and perceptionsbegan to change. The very fabric of analysiswas under siege by forces which had notbeen disclosed prior to the elections. Manythought that Hoover was merely making upstor ies and unwarranted accusat ionsagainst Roosevelt in respect to his "softmoney" attitude. That was political hype,they thought; Roosevelt wouldn’t conceiveof an unbalanced budget. But this gave wayto the reality of events and by mid-April,inflation was crowned to be the next saviorof world doom. Arguments became fierce.Europeans became fr ightened. Manyviewed that inflation in commodity priceswould bring a great bull market as it had in1907 and 1919. But this time they weregetting in on the ground floor. Who caredif the budget was balanced? Corporateprofits would rise and government wouldsimply float bonds to finance the entirespectacle. Why not buy and buy more?Those who were bearish in March turnedbullish in April and the confusion was lead-ing to insanity.


461

Strange as it may sound, markets ex-ploded during April on the news of inflationof all things. On the 17th of April, Timemagazine reported on the situation:

"GREAT ANTICIPATIONS"

"Last week wheat had its first whirl on theChicago Board of Trade since the excite-ment when that market opened after thebank holiday. Spot wheat touched 63 cents,up 5 cents for the week.

Last week corn had a whirl. Spot corntouched 35 cents (up 5 cents).

Last Week rye had a whirl. Spot ryetouched 50 cents (up 6 cents).

"Last week Board of Trade seats touched$7,000 (up $2,000) and the Board of Tradebegan again to feel as if springtime were theonly pretty ring time. Trader Thomas How-ell was seen several times upon the floorcontrary to his custom. Arthur Cutten was

reported active. Oldtime Trader GardnerB. Van Ness was home from Manhattan.Herbert J. Blum, long inactive, was re-ported once more functioning. Jesse Liver-more was back in Chicago with his new wifeand reported bullish on corn.

"The end of depressions, the beginning ofinflations are marked by rising commodityprices. Many a depressed trader began totake heart last week. Other commoditieswere on the mend. Sugar was up. Surplusesof sugar and wheat both reported down.Copper was up on news that U.S. mineswere preparing for a six month completeshutdown.

"Stocks took their cue from commodities,mounted moderately led by such compa-nies as American Sugar (in hope of sugarrecovery). Homestake Mine (bigger prof-its in gold if the dollar is devalued). CornProducts (in hope of corn recovery).

"Many such boomlets had been off and onduring the Depression. Traders looked for

RYE PRICES

Date

Per

Bus

hel

(per Bushels)

1871 1881 1891 1901 1911 1921 1931

300

280

260

240

220

200

180

160

140

120

100

80

60

40

20


462

profit-taking, some of which took place.But in last week’s bullishness there wasmore than a mere hope because prices andindices had shown a little upturn. Therewas the beginning of the attitude: what nowif not inflation? Either inflation becausecommodity prices would be turned upwardby natural and governmental stimuli; or in-flation because the Government is commit-ted to spending billions, must float bondissues to reopen banks, save mortgagors,provide relief and a dozen other costly en-terprises. Or inflation because Govern-ment might reduce the gold content of thedollar. Or simply inflation in expectation ofinflation. Inflation or inflation or inflation.What other alternative?"

Here Time magazine reported severalvery important aspects as to how peopleviewed the situation. Today so many peoplehold the view that the stock market is notsupposed to do well during inflationary pe-riods. As we continue, I will show that suchconcepts have emerged only because ofgovernment’s preoccupation with and har-assment of the free market system whichfocused very closely upon the commoditiesand stock exchanges as a direct result of theGreat Depression. This is no small state-ment; I am fully aware of that. But we willread further on how the government simplysaid it was against the law to trade below aprevious low or sell a stock short on a downtick.

First, notice how the inflationary conceptwas viewed to be bullish. It was well re-membered that the booms in 1907 and 1919were inflationary periods, particularly pro-nounced in raw materials. Analysts real-ized one thing. All per iods of greatexpansion and thus corporate profit wereperiods of inflation which were marked byrising interest rates as the bid for capitaldrove rates higher, just as stocks rose with

continual bidding as demand increased.They realized that steady or recessionary todepressionary periods were not periodswhen stocks rose but instead declined.Such periods were marked by declining in-terest rates as demand for capital declinedalong with economic activity and thus ex-pansion.

This is very important to understand. Wetoday no longer look at rates of interest inthis way. We have been conditioned to viewinterest rates in light of government harass-ment rather than in light of a free marketfrom its economic prospects. Some will ar-gue with this statement, but consider howmuch attention is paid to money supply andexpectations of Fed actions because of suchmovements. we turn bullish because weexpect a discount rate cut or we turn bearishbecause money supply rose and thus theFed might tighten.

There is something seriously wrong here.Prior to Roosevelt, government was NOTthe big brother and as a result its tentacleswere less intrusive and less costly. There-fore, the private sector was the dominantsector. If interest rates rose, it was becausedemand within the private sector was rising.But beginning with Roosevelt, the balancebetween government and the private sectorchanged. As it changed, so did the relation-ship to some extent. Today we can have theprivate sector decline through a recessionand interest rates would not drop back dras-tically between 6% to 1% as they did duringthis time frame. This is because govern-ment is a much larger part of the systemsince Roosevelt. This has distorted the per-ception as to when the market should liter-ally explode to the upside.

We find modern analysis bearish duringinflationary periods largely out of fear ofgovernment intervention when in reality it


463

should be bullish. Economies only expandwith inflation. They contract during defla-tion. In one aspect, inflation is a processwhere the public raises its demand for prod-ucts, thus bidding the price for those prod-u ct s h igh e r . Th e r e fo r e , e co n o m icexpansion takes place when such periodsexist. Companies hire more workers to in-crease production to meet demand.

In the post-Roosevelt era, inflation be-came institutionalized by governmentalforces apart from private demand. Thebenefits of increasing government spend-ing to spark this inflationary demandgreatly diminish because the aftereffectleaves high debt which must still eventuallybe repaid. That in turn prompts taxation torise, and in the end government comes backto the private sector to repay the outstand-ing debt. The next cycle diminishes be-cause more is being extracted from theprivate sector reducing future potential forexpansionary waves. Thus, the free marketsystem can continue to raise tax burdens tothe point that it might as well become acommunistic state where net wages are

drastically reduced and productivity there-fore declines through lack of worker incen-tive.

You will also recall that during the bullmarket of the 1920s many times the com-ments referred to the fact that money re-mained cheap and there was no appreciablesign of inflation. The reason for this confu-sion was twofold. First, the central bankconspiracy was seeking to influence foreignexchange by artificially maintaining lowerrates which merely served to drive capitalto where rates were higher. They hadhoped that was going to be Europe to re-lieve their credit crisis. However, this alsodrove much capital into the stock marketwhere it was seeking the higher level ofdividend payments. Second, the raw mate-rials were declining but the finished prod-ucts were rising in price. The lack ofmonitoring inflation in a sophisticatedmanner led to this misconception. Inflationin finished products had risen significantlybut primarily between 1927 and 1929. Dia-monds and luxury items, as well as the realestate boom, were all side effects of the


464

inflation that took place in the mark-up offinished products versus purely the raw ma-terials. Time magazine reported as follows:

"While inflationary psychology was thusgetting a start, it was abetted by talk ofcutting the gold content of the dollar. Presi-dent Roosevelt had finally issued an execu-t ive order under power given him byCongress in the emergency banking act, or-dering all holders of gold to turn it in to theGovernment by May 1 or take the penalty.What else did this mean except that theGovernment was gathering in all the goldpreparatory to melting it into smaller dol-lars? Or it might mean that Governmentwanted to gather up the maximum amountof gold to back the present dollar and per-mit release of earmarked gold of foreignnations."

In May, when interest on U.S. gold bondswas due, traditionally these issues called forinterest to be paid in gold for the lender hadlen t go ld , no t pape r . Neve r the less,Roosevelt broke the "covenant" as many

screamed about receiving their interest inpaper dollars. The Commercial & Finan-cial Chronicle addressed the issue quite se-r iously sta t ing, "The U n ited Sta tesGovernment has taken a step backwardinto the darkness of the Middle Ages!"

Many people were very confused. Theyassumed that Roosevelt’s recall of gold wasintended to reissue gold coins with lessweight and that would be the so- calleddevaluation. But when the May deadlinefor turning in the gold coins had passed andgovernment gold bond holders were notbeing paid their traditional interest in gold,concerns began to crop up. Nevertheless,commodities continued to rise with copperreaching 7 cents per pound, up from 5 centsin January. Legitimate shortages were ineffect taking place. Many of the curtail-ments in 1932 were now turning up as pro-jections for 1933 had been overstated. InMay, the Farm Board had sold its last 8million pounds of cotton on the futures ex-changes and cotton rallied to 9 cents.

Daily Volume on NYSE

in th

ousa

nds

May 1, 1932 - July 31, 1933

May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June Jul

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

0


465

The Federal Reserve’s index on depart-ment store sales for April 1933 illustrated a9% decline from April 1932. The first fourmonths combined expressed a decline of22%. April had at least begun to improveto some degree since the bank holiday butretail sales were still sharply lower com-pared to 1932 levels.

Commodities and stocks were still risingsharply in response to the anticipated infla-tion from one way or another. During earlyJune the news finally hit. The President wasnot going to cut the gold content of thedollar but eliminate the gold clause frompublic and private contracts. "Speculatorsgave a mighty heave that shot prices to thebest levels in two years. As the publicrushed to buy and buy and buy, transactionson the New York Stock Exchange swelledto an all- time Saturday record for a bullmarket -4,300,000 shares. Only once hadthat figure been exceeded - in the bearmarket of May 1930. At the end of the two-hour session, the new high-speed ticker was41 minutes behind the floor," reportedTime magazine on June 5, 1933. Com-

modities rallied to their highest level sincethe inflation boom began.

The Dow Jones Industrials had stormedvirtually straight up since the February low.The industrials rallied from 50 points toslightly below the 100 level, closing near thehigh in June. Confusion over exactly whatRoosevelt was doing persisted. Many as-sumed that only the gold clauses were beingeliminated and had no conception that theyhad seen their last gold coin.

Another factor that emerged during Junewas the new Securities Act of 1933, whichwas written by Professor Felix Frankfurterwho was Harvard’s top man. Lawyers weredesperately trying to find a loophole, butthere was none to be found. This man wasthe best. He taught his pupils how to takeapart laws and get around them. He knewhow to do it and as such was the perfect manfor the job. His Securities Act of 1933 hada very serious impact. Essentially it statedthat if any "material" fact is misstated or ifany "material" fact is omitted, each directoris held personally liable for the loss in-



120

110

100

90

80

70

60

50

40


466

curred by a buyer of the security. Few law-yers were prepared to advise their clientsthat they could go ahead and offer any se-curity. This led many to speculate that ashortage of stocks might develop.

The market continued to press higher intoJuly, reaching very close to the 110 level.But then suddenly, the industrials collapsedhard, closing the month near the low backat 90 on the Dow Jones Index. The newSecurities Act applied to new issues as wellas the buying and selling of securities thatwere already on the market. A debate natu-rally ensued. This was not the reason forwhat became known as the July Crash, butit played at least a part during the summerof ’33.

The volume for June 1933 was 125 millionshares, the largest on record with the excep-tion of October 1929. Between May andJune the combined total was 230 millionshares. The "wet" issues were clearly thebiggest movers. In July the demand for thisgroup had become so great that the ex-change raised the margin requirement to60% on the "wet" issues only. But the newswhich had all along driven this group up wasthat issue. The Feds left each state to de-cide for itself. The states that everyone waswaiting for were in the South when theSouthern States voted for repeal, the goodnews was out. The very next day the Crashof July 1933 began and the "wet" stocks ledthe way down. Along with them, the grainsin Chicago tumbled. That day 7 millionshares traded hands. Stops after stops wereelected and the broad market fell 20% bythe end of the month while many of the"wet" issues fell much more. The 20% dropdidn’t take long. It was all over in threedays! The Dow Jones Industrials had fallen19.96 points in just three days!

The market would have fallen much fur-ther during the summer of 1933 if it werenot for new rules that the government im-posed upon the various exchanges. Timemagazine reported on the 7th of August"Banned from the pit forever were all deal-ings in indemnities (options on grain fu-tures contracts generally regarded as pure


467

gambling)." The markets were also "forbid-den" to trade below the July low. Timemagazine reported upon the effects of thismeasure on the 14th of August:

"The great exchanges of the U.S. last weeklacked natural stimulants. On the ChicagoBoard of Trade the energy building grains,limited not only to 4 cent and 3 cent dailyfluctuations, but also forbidden (by a rulegood until August 15) to fall below theirJuly 31 closing levels, floundered ineffectu-ally...From similar listlessness, begottenpartly by regulation, Manhattan’s Stock Ex-change was saved by the outside stimulants.Following pricking of the speculative bub-ble three weeks ago, the Senate’s busyProsecutor Ferdinand Pecora called on Ex-change President Whitney, told him specu-lation must be curbed. Last week theExchange announced two new rules: 1) bro-kers must report weekly to the Exchange allthat they know of the operations of poolsand syndicates; 2) traders with debit bal-ances of over $5,000 must maintain marginsequal to 30% of the debit balance; thosewith debit balances less than $5,000 must

maintain a margin equal to 50% of the debitbalance. Calculated the ordinary way, theproportion of a trader’s equity to the totalvalue of the stocks in his account, the mar-gins now required to 23% and 33%. Exam-ple: if a man buys $1,500 worth of stock andgives his broker $500, he is said to have putup a 33% margin. However, his debit bal-ance is $1.000, of which $500 is 50% ade-quate margin under the new Exchangerules."

The market interest declined consider-ably. Faced with limits, increased margins,but worst of all investigation if you hap-pened to make money on the short side, theonly safe way to play the markets was fromthe long side.

The Administration therefore intervenedor simply forbid the market to trade belowthe July low. It was as simple as that. Howcould they do such a thing? Well as impos-sible or as outrageous as it might sound, thatis what happened. Nonetheless, they did itand the market churned back and forth.The traders themselves withdrew from the



58

56

54

52

50

48

46

44

42

40

38

36

34

32

30

28

26

24

22


468

market and liquidity shrunk. The rule wasrescinded on August 15 but other measureswere taken to support prices. Time maga-zine reported on the issue again in its Au-gust 28, 1933 edition:

"SQUARE PEGS & ROUND PITS"

"Three weeks ago Chicago’s Board ofTrade instigated by Washington, set a tem-porary level below which grain future priceswould not be allowed to sink. Last weekthat artificial floor was removed. Priceswhich had been bobbing along on the rulel ike ba l loons without l i ft ing powerpromptly dropped the maximum amountspermitted in one day’s trading. Great wasthe hullabaloo.

"Representative Jones of Texas and Sena-tor Smith of South Carolina promptlyswung inflationist thunderbolts about theirhead again. Letters and telegrams poured

into Washington demanding that the Gov-ernment re-peg prices.

"No such action was taken. Next morningthe grain pits reopened and prices promptlydropped and bounced. They mounted rap-idly and closed with substantial gains for theday. Thereafter they swung up and down,but neither sudden disaster nor abruptboom followed.

"Contributory cause that certainly helpedto steady the market was that, as the peg wasremoved, Secretary Wallace began to talkof the subsidizing of export of 50,000,000bushels of wheat from the Pacific-North-west, and of raising the wheat processing taxto pay for the subsidy. The Secretary ofAgriculture has power to fix processingtaxes at an amount equal to the differencebetween current prices and the averageprice 188 cents) for 1909-1914. The presenttax of 30 cents a bushel represented thatdifference on June 15. For several weeks


469

wheat prices have been about 88 cents butthe tax continues. But the processing taxcan be increased only if wheat prices fallbelow the June 15 level.

"The threat of subsidized exports mayhave been partly intended to support themarket. It served also as a club over theconference of wheat producing nationswhich met again this week in London to tryto agree on crop restriction. What one na-tion calls ‘subsidizing exports’ other nationscall ‘dumping.’ He proposed, however, todump wheat in the Orient thereby cuttinginto the exports of Canada and Australia tothose markets.

"Not according to the Golden Rule wasSecretary Wallace’s dumping threat for theU.S. Not only has a law against foreignersdumping in the U.S., but even when theSecretary made his announcement theTreasury Department was considering for-bidding imports of steel from Germany,tennis shoes, electric light bulbs and cal-cium carbide from Japan, stearic acid andthumb tacks from Holland, rock salt from

Canada, woven wire fencing, sulphide pa-per and binder twine from England, all onthe grounds of dumping."

As a result of the processing tax and jaw-boning, the Administration was able to fix acement foundation near the lows estab-lished by the crash of July 1933. Despitecries of "foul" from other nations, the Ad-ministration was clearly prepared to bendany law and impose whatever it deemednecessary to shape and mold the situationas it saw fit. Many such moves were un-doubtedly questionable on a constitutionbasis, yet they went unchallenged.

Roosevelt’s moves were creating havoc inall markets which was especially reflectedwith the foreign exchange. The inflationistscontinued to muddle into every aspect ofthe economy, launching investigation afterinvestigation. The power industry wasdeemed to be a public utility and the pricefixing attempts continued. These measuresseemed to become a kind of crusade bentupon tearing down the very fabric of thefree society and moving dangerously closer

BONDSMONTHLY: 1933


90

89

88

87

86

85

84

83

82

81

80

79

78

77

76

75

74

73

72


470

toward the idealistic goals of socialism andcommunism itself.

The group of Roosevelt’s advisors becameknown as the Brain Trust. In a letter to theeditor of the Wall Street Journal, I foundthis interesting note of personal expressionwhich was published on the 17th of October1933:

"Perhaps an old fashioned turn of mindhas made it impossible for the writer tofollow the Brain Trust advocacy of priceboasting. Not only has he read no convinc-ing exposition but he has heard none.Rather it has seemed as if prices ought tobe let alone unless we have gone Soviet andthe price of everything from birth to burialis to be government regulated as in thepublic utility field; and if such widespreadregulation awaits, we have a good sample inthe case of the railroads (they have beenregulated longer than other utilities) fullyillustrating the conflicts; huge costs forminga burden on both taxpayer and user and theconsequences if it be assumed, as the BrainTrust apparently does, the task can be ac-complished there comes the question, Willit be worth all the grief entailed to arrive atthat point?"

In the September 11, 1933 edition of Timemagazine, we find the following commen-tary in respect to the Administration’s poli-cies which affected the gold miningindustry. Many investors had been buyingthe gold mining stocks believing that goldwas going to rise as a result of the inflation-ist policies. Time reported on the situationas follows:

"Because the world is round, what is rightside up in the U.S. is upside down to China.Because of the geography of economics,gold miners like Chinese, are upside downcompared to other men. Most business-

men worry about what price they will get fortheir product, but in normal times gold min-ers never worry, since an ounce of gold is(normally) the ‘makings’ of $20.67, theprice they can get for their output nevervaries a penny. If other prices go up, othermen are apt to profit, but for the gold minerthat means only higher costs (no bigger in-come) and consequently smaller profits.

"Last March when Franklin Rooseveltruled that money was not gold, he broke theold equation; $20.67 would no longer buyan ounce of gold. He cheapened the dollarto make prices go up to let businessmenprofit. But he did not break the equation sofar as gold miners were concerned. Hewould not let them sell their gold to anyoneexcept the U.S. Government and the Gov-ernment would pay only $20.67. Gold min-ers were out of luck - their costs mountedbut the price of their product remained thesame."

This situation had become intolerable andgrossly unfair to the gold mines. The costswere rising rapidly. The mere cost of livinghad jumped 9% since March of 1933.Therefore, Roosevelt decided to allow thegold mines to deliver their product to theFederal Reserve and the Fed would sellgold to foreign buyers at the world price.This tended to export inflation to other na-tions, such as France, that had remained onthe gold standard. At the same time, thismeant that gold was a commodity in thatrespect and the proceeds were then cred-ited to the trade balance. The annual U.S.production was about 2.5 million ounces sothis would add approximately $75 million tothis economic statistic which previously hadnot been included.

However, along with that decision came aharsh rule as well. It had been estimatedthat $500 million in gold coin had not been


471


472


473


474

returned to the government as the edict haddemanded back in May. The AttorneyGeneral was then armed with another newlaw. Roosevelt could not declare it to beillegal outright to own gold since that wouldhave been a flagrant violation of the Con-stitution. So he took another approachwhich the courts ruled permissible. It wasthereby ordered that all U.S. citizens file areport to declare how much gold they held.Failure to file the report carried a $10,000fine or ten years in jail. So technically it wasnot illegal to hoard the gold, it was justillegal not to tell the Government that youwere holding it. This was merely one exam-ple of the sumptuary laws which were beingimplemented through the clever tactics ofswitching a few words here and there tocircumvent the true liberties which hadbeen originally granted by the Constitution.

Although the free press in many cases washard at work trying to protect the rights ofthe nation, it was a losing battle. Reprintedhere is an advertisement which the NewYork Herald Tribune took out in the WallStreet Journal. This was one of eight adver-

tisements in which the Tribune took uponitself to stand up and fight back. The head-line "Time To Fight" was well taken. Thebiggest crime perpetrated upon the nationwas that the people voted for a man whohad not revealed his true intentions of howhis "New Deal" was going to achieve itsgoals.

As October emerged, the dollar contin-ued to decline sharply on foreign exchangemarkets. The commodities and the stockswere still bouncing off of support but losingtheir strength from one bounce to the next.In October, the Dow Jones Industrialsdipped below the July low by 1 point andthen quickly scooted up as to not bringdown the wrath of the demigods of Wash-ington. The Senate’s probe into the stockmarket continued and investigations con-tinued in an ever increasing scope. Thoseit questioned, it delved into whatever areasit could and then hauled people off for in-come taxes or whatever violation of law itcould muster up. To refuse to appear meantimprisonment. It was indeed a Spanish in-

SWISS FRANC

SW

ISS

FR

AN

C P

ER

U.S

. DO

LLA

R

MONTHLY: 1933


0.31

0.3

0.29

0.28

0.27

0.26

0.25

0.24

0.23

0.22

0.21

0.2

0.19


475

BRITISH POUNDU

.S. D

OLL

AR

PE

R B

RIT

ISH

PO

UN

D MONTHLY: 1933


5.2

5.1

5

4.9

4.8

4.7

4.6

4.5

4.4

4.3

4.2

4.1

4

3.9

3.8

3.7

3.6

3.5

3.4

3.3

FRENCH FRANC

FR

EN

CH

FR

AN

C P

ER

U.S

. DO

LLA

R MONTHLY: 1933


26

25

24

23

22

21

20

19

18

17

16


476

quisition and its probe became known asthe "book of revelations."

Now the battle to stem the collapse of thedollar came to the forefront during Octo-ber. Time magazine reported on the flightfrom the dollar in its September 25, 1933edition.

"FLOWN DOLLARS"

"Dollars sank last week to the lowest levelsince the U.S. quit the gold standard, 63cents. Because President Roosevelt hadnot yet seen fit to devalue the dollar, theprice is determined by supply and demandin international exchange. And becausethe U.S. has a favorable trade balance, de-mand is normally greater than supply.Whence the dollar flood has eaten away 35cents of every 100 cents in each U.S. dollarsince last April. Continental money-chang-ers, canniest of whom are reputed to be ‘theGreeks,’ delight in selling dollars short, butbankers know that accounted for only afraction of the drop. Last week from theBritish Commonwealth Relations Confer-

ence in Toronto came confirmation of whatWall Street has long suspected; that U.S.citizens have exported their dollars by thehundreds of millions.

"‘One of our problems,’ droned ViscountCecil of Chelwood, chairman of Britain’sdelegation, ‘is the flood of unwanted moneythat is pouring into our banks. These funds,deposited in the main by U.S. investors, aresubject to withdrawal at 24- hour notice andare of little or no value, though it has not yetbeen discovered how to get rid of them.’

"Standard Statistics Co., Inc., world’s larg-e st f igu r e fa ct o r y, e st im a t e d t h a t$1,000,000,000 had flown the Atlantic, thebulk of it to London. France, whose tie togold is none too secure, has received little,but Holland and Switzerland have beendrowned in dollars. Unlike exports of goldwhich is strictly banned (for private citi-zens) the flight from the dollar has beenquiet ly encouraged by Washington; itpushed down the price without requiringdevaluation by Presidential decree."

DUTCH GUILDER

DU

TC

H G

UIL

DE

R P

ER

U.S

. DO

LLA

R

MONTHLY: 1933


70

65

60

55

50

45

40

35


477

On October 11, 1933, the Wall StreetJournal reported on this new battle againstthe short positions in the dollar.

"U.S. STRIKES AT DOLLAR SHORTS"

"For the past two weeks there have beengrowing indications that the federal govern-ment is tightening its grip on the foreignexchange control or official interventionsuch as is practiced by the British ExchangeEqualization Fund but the market is con-vinced, nevertheless, that hitherto uncon-trolled fluctuations in dollars exchange.

"Thus far it has taken the form of a tight-ening of the control with regard to ‘swaps’in the futures market. This is a blow aimeddirectly at the foreign speculator who hasbeen maintaining an open short account indollars in the belief that the American unitis headed for still lower levels in the world’smarkets.

"Up until present, the foreign speculator,operating abroad has maintained his shortposition by ‘swapping’ contracts which arefalling due for other contracts, say 90 daysaway. For example, if dollars had been soldfor October 15 delivery, at the approach ofthat date October 15 would be bought and

Hungarian - Pengo


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.1755

0.1754

0.1753

0.1752

0.1751

0.175

0.1749

0.1748

0.1747

0.1746

0.1745

0.1744

0.1743

0.1742

Polish - Zloty


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.114

0.1139

0.1138

0.1137

0.1136

0.1135

0.1134

0.1133

0.1132

0.1131

0.113

0.1129

0.1128

0.1127

0.1126

0.1125

0.1124

0.1123

0.1122

0.1121

0.112

Portugese - Escudo


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.05

0.049

0.048

0.047

0.046

0.045

0.044

0.043

0.042

0.041

0.04

0.039

0.038

0.037

0.036

0.035

0.034

0.033

0.032

0.031

Yugoslavian - Dinar


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.018

0.0179

0.0178

0.0177

0.0176

0.0175

0.0174

0.0173

0.0172

0.0171

0.017


478

January 15 dollars sold against them. Thisproduces a temporary demand for spot dol-lar exchange but the continued pressure onthe forward market is depressing influenceson the rate. The ‘swap’ really amounts toborrowing of dollars for speculative pur-poses.

"Permission is being granted to execute‘swaps’ when it is shown that they are basedon legitimate commercial needs. For ex-ample, if a shipment of goods has beendelayed in delivery, it may be necessary toextend the exchange position until thegoods are delivered and the exchange con-tract settled. No difficulty is experienced inobtaining permission for this type of trans-action.

"The Continental exchange speculator,however, has no such basis for his transac-tions, which are financial rather than com-mercial, and permission for financial swapsis being refused. The effect of this proce-dure, it is believed in the foreign exchangemarket, will be to produce a growing out-right demand for dollars as the short con-tracts mature, and which will not be offsetby sales of futures. Commercial supply ofdollar exchange is said to be very small."

Austrian - Schilling


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.15

0.149

0.148

0.147

0.146

0.145

0.144

0.143

0.142

0.141

0.14

Bulgarian - Lev


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.0073

0.00729

0.00728

0.00727

0.00726

0.00725

0.00724

0.00723

0.00722

0.00721

0.0072

0.00719

0.00718

0.00717

0.00716

0.00715

0.00714

0.00713

0.00712

0.00711

0.0071

Czechoslovakian - Korun


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.02968

0.02967

0.02966

0.02965

0.02964

0.02963

0.02962

0.02961

0.0296

0.02959

0.02958

0.02957

0.02956

0.02955

0.02954

0.02953

0.02952

0.02951

Greek - Drachma


U.S

. Dol

lar

per

Cur

renc

y U

nit

Date: Jan. 1928 - Dec. 1931

1928 1929 1930 1931

0.01335

0.0133

0.01325

0.0132

0.01315

0.0131

0.01305

0.013

0.01295

0.0129


479

Here we find another example of whatwould today be unthinkable. The foreignexchange futures which are being referredto here are cash forwards. If you sell aJanuary position you could find yourselfwith no means to legally buy back yourposition. So strange as it might sound, theydrove speculators out of the short positions.Government just didn’t want any short betsagainst them in any market. They sought tohave their cake along with a full belly andfree rent all at the same time. If it couldn’tbe achieved by a free market system, thenthey would make up their own rules andlimit the freedoms of the market to theirliking.

The last four months of 1933 were markedby numerous shocking issues. Many of thesteps taken to force the markets to yield tothe will of government are steps which willone day soon be reimplemented. Today weare all aware of the G-5 group of centralbanks and the political consensus aroundthe world that promotes the manipulationof foreign exchange to achieve economicstability. The methods of the present are nodifferent from those attempted by the cen-tral banks first in 1925, again in 1927 andfinally by Roosevelt in 1933. In the Septem-ber 25, 1933 edition of Time magazine, wefind an interesting comment as to how thestock market was viewed to be a hedgeagainst the currency inflation policies ofRoosevelt. This is very important becauseI seriously doubt that anyone would viewthe stock market today as a hedge againstinflation. Nevertheless, this issue was theprimary factor which led the stock marketinto its rally which eventually peaked dur-ing 1937. Time magazine reported uponthis aspect as follows:

"Methods of hedging against inflationwithin U.S. frontiers have become a favor-

ite coffee-&-cognac topic. Purchase of in-dustrial stocks is, of course, the most popu-lar hedge, but commodities and land havebeen creeping up fast since the NRA threat-ened profits with higher labor costs. Someshrewd businessmen with little capital atstake argue that the best thing is to go asdeep into debt as the banks (or friends) willallow; eventually they will pay off withcheaper dollars. Carl Snyder, economistfor the Federal Reserve Board, was asked


480

lately by a wealthy friend how he couldhedge against all possible contingencies in-cluding deflation or stabilization so that hewould die as rich as he was at that moment.‘One way,’ snapped Economist Snyder, ‘isto shoot yourself.’"

The comment of economist Snyder in avery realistic sense was quite true. The onlyguarantee that one would die with essen-tially his current assets in this situation wasto commit suicide for you never know whattomorrow would bring.

There is no doubt that during the year1933, the stock market gained significantlyon the prohibition issue which anticipatedthat the country would turn "wet" as of Janu-ary 1, 1934. But the ent ire issue ofRoosevelt’s currency inflation had a largeimpact upon the performance of the marketas well.

The market began to rally finally from thesummer of 1933 lows on the perception ofa hedge against inflation. After a rally intoJanuary 1934, the market fell back and con-solidated into a July low during 1934 onceagain. From there, commodity prices be-gan to rally after the convertibility of goldfor U.S. citizens had been officially aban-doned in January 1934 and the effects ofinflation began to spread throughout theworld. Eventually, the inflation scenariocontinued to drive the markets higher into1937.

From March 1933 into 1937, stocks roselargely upon the belief that inflation wouldraise the price levels of commodities andtherefore earnings would r ise as well.Stocks were also viewed as a hedge againstinflation as we read in the September 25,1933 edition of Time magazine. Therefore,we find some continuity in the analysiswhich took the position that stocks wouldrise in the shadow of commodities. Thiswas largely created by the fact that much ofthe economy was heavily commodity ori-ented. High techs were not exactly the rageof the times. Keep in mind that the automo-bile was viewed to be a large consumer of


481

BRITISH POUND

U.S

. DO

LLA

R P

ER

BR

ITIS

H P

OU

ND MONTHLY: 1934


5.25

5.2

5.15

5.1

5.05

5

4.95

4.9

CANADIAN DOLLAR

U.S

. DO

LLA

R P

ER

CA

NA

DIA

N D

OLL

AR

MONTHLY: 1934


1.026

1.024

1.022

1.02

1.018

1.016

1.014

1.012

1.01

1.008

1.006

1.004

1.002

1

0.998

0.996

0.994

0.992

0.99

DANISH KRONER

U.S

. DO

LLA

R P

ER

DA

NIS

H K

RO

NE

R

MONTHLY: 1934


0.23

0.229

0.228

0.227

0.226

0.225

0.224

0.223

0.222

0.221

0.22

DEUTSCHE MARKU

.S. D

OLL

AR

PE

R D

EU

TS

CH

E M

AR

K

MONTHLY: 1934


0.406

0.404

0.402

0.4

0.398

0.396

0.394

0.392

0.39

0.388

0.386

0.384

0.382

0.38

0.378

DUTCH GUILDER

U.S

. DO

LLA

R P

ER

DU

TC

H G

UIL

DE

R MONTHLY: 1934


0.69

0.685

0.68

0.675

0.67

0.665

0.66

0.655

0.65

0.645

0.64


482

FRENCH FRANC

FR

EN

CH

FR

AN

C P

ER

U.S

. DO

LLA

R MONTHLY: 1934


16

15.9

15.8

15.7

15.6

15.5

15.4

15.3

15.2

15.1

15

14.9

ITALIAN LIRA

U.S

. DO

LLA

R P

ER

ITA

LIA

N L

IRA

MONTHLY: 1934


0.087

0.0868

0.0866

0.0864

0.0862

0.086

0.0858

0.0856

0.0854

0.0852

0.085

0.0848

0.0846

0.0844

0.0842

0.084

0.0838

NORWEGIAN KRONER

U.S

. DO

LLA

R P

ER

NO

RW

EG

IAN

KR

ON

ER

MONTHLY: 1934


0.259

0.258

0.257

0.256

0.255

0.254

0.253

0.252

0.251

0.25

0.249

0.248

SPANISH PESETAS

U.S

. DO

LLA

R P

ER

SP

AN

ISH

PE

SE

TA

S

MONTHLY: 1934


0.139

0.138

0.137

0.136

0.135

0.134

0.133

0.132

0.131

0.13

0.129

0.128

SWISS FRANCU

.S. D

OLL

AR

PE

R S

WIS

S F

RA

NC

MONTHLY: 1934


0.332 0.331 0.33 0.329 0.328 0.327 0.326 0.325 0.324 0.323 0.322 0.321 0.32 0.319 0.318 0.317 0.316 0.315 0.314 0.313 0.312 0.311 0.31

SWEDISH KRONOR

U.S

. DO

LLA

R P

ER

SW

ED

ISH

KR

ON

OR

MONTHLY: 1934


0.286

0.284

0.282

0.28

0.278

0.276

0.274

0.272

0.27

0.268

0.266

0.264

0.262

0.26

0.258

0.256

0.254


483

commodities. So we do find that there issome logic to the commodity relationshipprior to World War II. But as the economydeveloped over the next several decades,the U.S. industrials and service orientedbusiness sectors began to play a much moredominant role in the GNP of the UnitedStates. Thus, the concept of commodity

relationships with the stock market hasbeen divided and almost forgotten for thebroad market as a whole.

After inflation spending continued yetcommodities and stocks declined from the1937 high, that scenario of currency infla-tion disappeared and Roosevelt’s theoriesappeared to be a total failure. If Keynes’theory that government could increasespending to stimulate the economy was cor-rect, then there should have never devel-oped the depression of 1938-1940.

There are some historians who have triedto claim that the recovery of 1933-1937 waslargely created by the rearmament ofEurope. This is a gross misrepresentationbecause although the rearmament processhad begun to some degree in Europe, thegreatest amounts of spending took place inthe post-1937 period in direct contrast tothe contraction within the private economy.H owever , governmental spending inEurope rose three times that of consumerspending during the 1930s.

What had evolved between 1934 and 1936was a strange new battle among westernnations. It was the battle of official devalu-ations to gain price and trade advantages.The recovery which had developed from1933 was most pronounced within the non-gold bloc nations. Those who had re-mained on the gold standard such as Francewere left in a position where their curren-cies became overvalued, adversely affect-ing their trade positions in some sectors.

Trade Surplus (Deficit)*

U.S. Britain France Germany

1933 224 (258) (9.96) .67

1934 478 (284) (5.25) (.27)

1935 236 (275) (5.47) .11

1936 33 (346) (9.92) .55


484

1937 165 (432) (18.45) .42

1938 1134 (388) (15.47) (.19)

1939 859 (400) (12.70) .44

1940 1396 (663) (28.86) (.12)

*U.S. in millions, U.K. in millions

France in billions, Germany in billions

The shift in trade in favour of the non-goldbacked U.S. dollar in 1934 resulted in in-creasing the trade deficits in Britain andGermany. This devaluation of Roosevelt’smerely increased the trade pressure in thesame sense as imposing tariffs. Eventually,the French franc’s overvaluation led to do-mestic pressure to devalue from the busi-ness sector. This was viewed as a means ofmaking French goods more competitive.This eventually caused the French to de-value their franc in September 1936. Aspart of that devaluation, the TripartiteAgreement was finally reached among theUnited States, Britain and France. Thisagreement essentially stated that each na-tion would refrain from competitive ex-ch a n ge d e p r e cia t io n . R o o se ve l t ’sdevaluation theory proved that other na-

tions could just as easily devalue their cur-rencies in response and as such a war ofcompetitive devaluation would merely fol-low until everyone was right back wherethey began. The purpose of this agreementwas to smooth out the erratic swings withinthe foreign exchange markets and to regainsome sense of stability once again. But thisagreement failed to prevent the Frenchfranc from falling against both the poundand the dollar between 1936 and 1938.Against the pound, the franc fell from 105in 1936 down to 178 to the pound by June1938.

Up to this point in time, economic con-tractions had officially been referred to as adepression. It was the contraction from the1937 high which gave rise to a new termwhich was recession. This new term waspurposely introduced in an effort to refrainfrom giving any suggestion that the econ-omy was shipping back into a depressionsuch as that which had just been experi-enced during the 1929-1933 era.

French Franc


U.S

. dol

lar

per

Fre

nch

fran

c


1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933 1936 1939

$0.21

$0.20

$0.19

$0.18

$0.17

$0.16

$0.15

$0.14

$0.13

$0.12

$0.11

$0.10

$0.09

$0.08

$0.07

$0.06

$0.05

$0.04

$0.03

$0.02


485

Curiously enough, the dollar began to risesignificantly against the French franc andthe Italian lira and moderately against theBritish pound moving into 1937. Again thestock market was influenced by foreign ex-change during this period.

The depression which evolved from 1937is very important to our understanding ofwhat makes a market move, as well as to ourperspective of economic theory itself. Thefollowing table illustrates some interestingpoints within the U.S. economy.

Between 1933 and 1937, confidence defi-nitely began to move back toward the pri-vate sector. The spread between Moody’sAAA corporate bond yield and that of U.S.Treasury issues began to narrow signifi-cantly. Corporate yields declined by 27.3%while Treasury yields declined by 17.2%.Although many people were looking atstocks as a hedge against inflation, they alsorecognized that eventually a cost of thatinflation posed a rise to some extent in therisk of government bonds. Therefore, cor-porate bond yields declined at a far morerapid pace during the inflationary period of1933-1937.

1933 1934 1935 1936 1937 1938Military Spending (mil)

41 34 41 38 41 41

Government Purchases (bil)

43 48 50 58 56 61

Money Supply M1 (bil)

20 22 26 30 31 30

Federal Budget (bil)

-2.6 -3.6 -2.8 -4.4 -2.8 -1.1

Natl Debt 22.5 27.1 28.7 33.8 36.4 37.2

G.D.P. 15.2 16.4 17.9 20.3 21.3 20.4

G.N.P 222.1 239.1 260.0 295.5 310.2 296.7

Wholesale Price

Index 34.0 38.6 41.3 41.7 44.5 40.5

Government Bond

Yields (%) 3.31 3.12 2.79 2.69 2.74 2.61

Moody Corp. Bond

Yield (%) 4.49 4.00 3.60 3.24 3.26 3.19

The above table illustrates that govern-ment spending was rising significantly onthe social side. I have provided the militaryexpenditures, which you can see for your-self remained relatively stable. Money sup-ply, as measured by M1, rose some 55%between 1933 and 1937. The wholesaleprice index rose 30.8%, reflecting a sizablejump in inflation under Roosevelt’s Ad-ministration. The Gross Domestic Productincreased slightly more than inflation, post-ing a gain of 34.2% which was actually 3.4%greater than inflation. GNP, which includesgovernment expenditures, rose 39.6%.The National Debt, which stood at $22.5billion in 1933, rose to $36.4 billion, ashocking rise of 61.7%. Therefore, it is ob-vious that the currency inflation and mas-sive government spending did not producethe same percentage recovery within theeconomy. Roosevelt’s policies increasedthe national debt by 61.7% while the GrossDomestic Product rose merely 34.2%. The


486

U.S Gross National Product


annu

al p

erce

ntag

e ra

te o

f cha

nge

annual rate of change at market value

1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08

-0.1

-0.12

-0.14

U.S. National Debt in Billions

in b

illio

ns o

f dol

lars


1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940

0.22

0.2

0.18

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06


487

cost to extract those economic improve-ments in the long run were far greater thanthe benefits.

Commodities at their peak in 1937 by andlarge barely managed to rally and test thelows which had been set during the paniccollapse back in the 1921 postwar era. Thestock market had rallied back to the No-vember 1929 low. When the severe reces-sio n in t o 1938 b e gan , go ve r n m e n texpenditures continued to r ise in theUnited States. Total government purchasesrose 8.7% while the Gross Domestic Prod-uct declined 5% along with GNP. Unem-ployment rose 32.8% between 1937 and1938. Interest rates actually began to de-cline from their 1937 high. Corporate in-come taxation rose 363% between 1932 and1938. European government expendituresrose at a rate 300% greater than consumerexpenditures. In all cases, the sharplyhigher government expenditures failed toprevent the "recession" of 1938. If there wasever a clear warning signal to illustrate thatKeynesian economics only worked in the-

ory and not in reality, it was at this earlyjuncture in the world economy.

A seldom remembered economist of theturn of the century wrote a textbook whichwas in use prior to the Keynesian-Rooseveltera. His name was Professor Richard Elyof the University of Wisconsin and his book,"Outlines of Economics" was published bythe Macmillan Company in September1923, first edition 1893. The book relays avery basic fundamental of economic obser-vation, and the chapter on the BusinessCycle contains a very important descriptionof the business cycle which has been longsince forgotten.

"BANKING AND THE BUSINESS CYCLE"

"That the way the mechanism of bankingoperates has much to do with the cyclicaloscillations of business is scarcely open todoubt. Banks furnish an elastic supply ofpurchasing power, swelling in volume asbusiness transactions increase and there-fore the supply is elastic only up to a certain

Differential Between Corp & Treas Yield(Moody’s AAA - Treasury Bonds)

1929 1931 1933 1935 1937 1939

1.4

1.3

1.2

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0


488

point often enforcing a sudden halt to fur-ther expansion.

"The period of depression following acrisis is a period of liquidation. Businessfirms reduce their debts. The loans and thedeposits of the banks decrease and thustheir reserve ratios increase. Furthermore,with low prices and a sluggish movement oftrade, money that had been in hand to handcirculation collects in the banks. Lowprices stimulate exports and discourage im-ports, so that a favorite turn of the balanceof trade sometimes brings in gold fromother countries. In such ways the reserveratios of the banks are still further aug-mented. Low discount rates result, andmake business undertakings more attrac-tive. Bonds sell at good prices, so that thetime is propitious for building new plantsand for other undertakings requiring largepermanent investments of capital.

"Important as the cyclical oscillations ofbank credit are, however, they do not suf-fice to explain the business cycle. Cheapsupplies of credit help to give the stimulus

that turns business upward, enabling it topass from depression into the period ofrecovery. Exhausted supplies of credit,moreover, may bring prosperity to an end.But for the most part credit plays a passiverole. Its expansion follows rather than pre-cedes the expansion of business and even ifthe supply of credit were unlimited, busi-ness could not continue to expand indefi-nitely. The world’s recent experience withirredeemable paper money has provedonce more that no amount of inflation willcarry business and industry up with it be-yond a certain point. It operates like a drug,of which increasing doses are required tokeep vitality from sagging below its normallevel. Inflation may delay but cannot pre-vent the inevitable collapse."

Professor Ely’s explanation is undoubt-edly a voice calling from a long forgottenpast. Roosevelt chose to ignore the even-tual outcome of inflation and focused onlyupon its early stages where prices begin torise. But it is absolutely true that there iswhat I call a certain stall factor in the infla-tionary cycle. It is similar to that of an

Comparison of Call Money-Dow-GNP-PPI

Ann

ual %

Rat

e of

Cha

nge


1920 1922 1924 1926 1928 1930 1932

1.4 1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

-0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7

Call Money Dow Industrials PPI GNP


489

U.S. Gross National Product

GNP at market prices

Ann

ual %

Rat

e of

Cha

nge


1901 1906 1911 1916 1921 1926 1931 1936

0.16

0.14

0.12

0.1

0.08

0.06

0.04

0.02

0

-0.02

-0.04

-0.06

-0.08

-0.1

-0.12

-0.14

U.S. Producer Price Index

1980 = 100

Ann

ual %

Rat

e of

Cha

nge


1901 1906 1911 1916 1921 1926 1931 1936

0.4

0.3

0.2

0.1

0

-0.1

-0.2

-0.3

-0.4


490

airplane at takeoff. Somehow it may haveenough thrust to lift off from the ground butif enough thrust is not maintained, thegravitational forces will go to work and theplane will stall and fall back to earth.

The economy also has this stall speed. Itis not easy to pinpoint the precise pointwhere an economy will stall based upon allthe various indicators, but it is unquestion-ably there. This is why the recession whichcame upon the economy abruptly in 1938stands as a witness to the failure of Keynes-ian theory that government spending canhelp control the economy, thereby smooth-ing out the bumps. Perhaps it can help dur-ing the very depths of depressed marketsbut it is clear that this theory does not workindefinitely. If it did work, then the 1938recession would not have taken place whilegovernment spending continued to rise8.7% between 1937 and 1938. It is at bestpossible in theory that if "government ex-penditures" had been increased in propor-tion to the contraction in consumer andbusiness expenditures that the "recession"could have been avoided. However, when

the definition of a recession is two quarterlydeclines in the GNP, it becomes impossiblefor government to know when to increaseits expenditures to compensate for the con-traction within the economy.

The "recession" of 1938 had a profoundimpact upon the thinking behind the mar-ketplace. It was here that the fundamentalanalysis began to change, realizing that in-flation also raised the cost of doing businessand in downturns, companies seemed to beeven more sensitive because their cost ofdoing business had risen sharply as well.Thus, the concept that the stock marketdoes not do well during inflationary periodsemerged as a direct result from the rise ininflation through government spending be-tween 1937-1940 while the market declinedby 50% and then consolidated. This, by andlarge, has remained with the general analy-sis of the market. Take careful note thatprior to the emergence of Roosevelt’s big-ger government, stocks had previously ral-lied sign ificant ly dur ing in flat ionaryperiods and declined during deflationaryperiods. Now we view inflation as a nega-

U.S. Gov’t Purchases of Goods & Service

Ann

ual %

Rat

e of

Cha

nge

In Current Dollars (Billions)

1930 1932 1934 1936 1938 1940

0.25

0.2

0.15

0.1

0.05

0

-0.05

-0.1

-0.15


491


492

tive influence upon the market and at timesI have been astonished to listen to someanalysts who have even viewed increases intaxation as anti-inflationary and therebybullish for the market. In the future, expectthat this analysis will once again shift and inits place will emerge the realization thatcorporate assets appreciate with inflationas well as profits. The negatives whichmany view today will flip around into posi-tives in the years ahead. The majority mayat first be astonished that stocks will risewith inflation once again until it hits thatstall speed which is most likely going tooccur during 1989-1990.

In reality, prosperity is a period wherebusiness profits increase. Those profits de-pend upon the spread between expenses ofproduction and the income from the sale ofproduction. The reason that profits in-crease during inflationary periods is actu-ally quite simple. Much of the overhead inbusiness, such as rent, interest on bonds,etc., is fixed. As economic activity begins toexpand, these portions of overhead remainconstant, thereby reducing their impact ona percentage basis as prices of output rise.Many management decisions look at thedemand and begin to expand their produc-tion and, in doing so, their fixed overheadrises significantly. Raw materials generallylag behind the business cycle because mostcommodities cannot be expanded as rapidlyas business. As a result, commodity pricesrise rapidly toward the end of the cycle. Asthe economy expands, employees them-selves begin to become a rare commodity.As unemployment declines, business thenmust raise wages to obtain competent help.Therefore, when the stall speed is reached,much of the overhead has risen signifi-cantly. Eventually, competition increasesand with it, profits are normally cut as pricewars and overproduction begin to emerge.Cost reductions are implemented, which

usually cut first at employees because leaseson premises are generally long term tosome degree and represent fixed levels ofoverhead. Therefore, unemployment be-gins to rise once again.

Roosevelt’s experiment chose to raise theprice of commodities first through currencyinflation. In the normal business cycle,


493

commodities rise toward the end, not at thebeginning, because they are responding tothe higher levels of demand. Therefore, theperiod of 1933-1937 is different from mostexpansionary recoveries. Here we had com-modities rise first as Roosevelt attemptedto artificially create a boom. But it failedand as a result the capital expenditures rosesignificantly for government. The cost ofproduction for business rose dramaticallyfrom the outset; thereby the underlyingprofits, which are accrued during the earlystage of the business cycle, were not avail-able for utilization during the later part ofthe business cycle. Therefore unemploy-ment, which had peaked at 24.9% in 1933and declined to 14.3% in 1937, rose 32.8%in 1938 back to 19% of the civilian labourforce. The civil labour force in 1929 wasequal to 40.3% of the population. In 1938,the civil labour force was 42%. Therefore,the number of persons thrown into unem-ployment during 1938 exceeded the rise innumber between 1929 and 1930.

This is why the recession of 1938 wassharply expressed by the 50% decline

within a 12 month period from the 1937high in the Dow Jones Industrials. Contin-ued profits depended solely upon a con-tinuation of price inflation. This in a veryreal sense turned business into a specula-tive venture gambling upon inflation toraise the price of its products. When theeconomy is built upon such a flimsy founda-tion, once demand declines, the situation isripe for crisis in a shorter period of time.

The trade picture between Europe andthe United States increased in general grosslevels but essentially exports to and importsfrom Europe remained relatively stable. In1932, U.S. exports to Europe were $784million and imports were $390 million. In1937, exports were $13 billion while im-ports were $843 million. Exports increased73.4% while imports increased 86.09%.Roosevelt’s policies had increased pricelevels, but the trade surplus continued todecline. On a net accounting basis, the situ-ation became worse and the inflationarypolicies raised employment, but the trenddictated that it was still a negative growthfactor that was being artificially maintained

U.S. Unemployment Rate

Per

cent

age

rate

of C

hang

e


1933 1934 1935 1936 1937 1938 1939 1940

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%


494

U.S. Balance of Trade with Europein

mill

ions

of d

olla

rsin millions calculated by value

192919301931193219331934193519361937193819391940194119421943194419451946

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

0

US & Great Britain 3 month Rates

Per

cent

age

Rat

e of

3m

nth

T-B

ills

1931 1933 1935 1937 1939 1941 1943 1945

4

3.5

3

2.5

2

1.5

1

0.5

0

US UK


495

by government’s inflationary policies. On atotal world trade basis, the U.S. trade sur-plus under the Smoot-Hawley Act was $324million and in 1937 it was $270 million. Inone respect, the salaries of those who wereput back to work during the 1933-1937 re-covery were paid by the dramatic rise ingovernment spending, which turned up inthe national public debt. Today we are stillpaying interest on Roosevelt’s spendingfrom this era. Had Roosevelt hired thosepeople and placed them on the governmentpayrolls, the economic effect from an ac-counting standpoint would have been nodifferent. The situation would have im-proved had the trade surplus grown and notdeclined.

Another interesting effect began to takeplace in response to Europe’s arms build-up. The dollar began to strengthen signifi-cantly from 1936 when France devalued thefranc. The British pound continued to fallfrom the $5.00 level to $4.67 by the end of1938. But as rearmament began to spreadthroughout Europe, the pound plungeddesperately from $4.67 in mid-1939 to $4.03on September 3, 1939 when exchange con-trols were introduced to fix the pound atthat level for the next ten year period. Thepound never again saw the old pre-WorldWar I level of $4.86.

As fears of war began to increase through-out Europe, capital once again began to fleetoward the United States. This caused thedollar to rise on world markets and the oldscenarios began to come alive. Foreignbuying actually supported the U.S. stockmarket in 1938. Even though the economywas not exactly booming just yet, the lack ofinterest on the part of U.S. investors wasmore than augmented by European capitalinflow. Therefore, foreign exchange hadplayed an important role once again at theturning point for the U.S. stock market.

The side effect of this foreign capital enter-ing the U.S. economy was exactly the sameas it had been during the 1920s. Interestrates, which had initially begun to rise be-tween 1936 and 1937, reversed their trendin the United States quite abruptly. The


496

British Treasury Bill rate for three monthsjumped from .563% in 1937 to 1.315% in1939. It would drop back under 1% even-tually only after World War II. The UnitedStates Three Month Treasury Bill rate de-clined from .45% in 1937 to .02% in 1939,continuing to its lowest point in history dur-ing 1940 at .01%. The dramatic swings be-tween the short-term rates in the UnitedStates and those in Britain illustrate justhow intense the capital flow into the UnitedStates had become.


497


From the 1937 high in the Dow JonesIndustrials, the market essentially

traded sideways back and forth between the160 level, eventually falling under the 1938low moving into April 1942. Then the tradesurplus began to widen in favour of the U.S.

as Europe needed the production facilitiesfrom its industries. By the spring of 1946,the Dow Jones Industrials rallied from 93to 212 throughout the course of World WarII. Trade Surplus (Deficit)

U.S. Europe U.K. France

1941 1,675 1,566 (649) (9.16)

1942 5,247 3,789 (721) 3.71

1943 9,461 7,693 (994) 21.45

1944 10,233 9,364 (1,027) 15.79

1945 5,426 5,106 (654) (45.63)

1946 4,767 3,318 (336) (16.33)

1947 9,530 4,853 (597) (17.38)

The above table of foreign trade illus-trates how the world situation stood be-tween 1941 and 1947. The first columnrepresents the total world trade picture ofthe United States expressed in millions ofdollars. The second column, U.S./Europe,

is exclusively the trade between Europe andthe U.S. in millions of dollars. Note thatEurope was the largest trading partner.The United Kingdom (Britain) is expressedin millions of pounds and the French datais provided in billions of francs.

We can see clearly that the huge swing inthe trade surplus for the United States assupported by the above table, provided twoaspects to the U.S. economy and market-place. First, the capital inflow sparked vir-tually a straight up move in the Dow JonesIndustrials between 1942 and 1946. If yourefer to the chart covering the years be-tween 1941 and 1950, notice that the onlypause in the trend came during the laterpart of 1943. Other than that five monthcorrection, the trend was virtually straightup with only seven other months which evenbriefly penetrated below the previousmonth’s low. When the market came to itsabrupt high in 1946, the bottom was wellestablished during the five month panic col-lapse in 1946 from the major high.


1941 1942 1943 1944 1945 1946 1947 1948 1949 1950

220

210

200

190

180

170

160

150

140

130

120

110

100

90


498

The second effect that this huge tradesurplus in favour of the United States hadupon the economy was reflected in the of-ficial gold reserves. It was America’s indus-trial production through the innovation ofthe automobile and the airplane that pro-vided goods for European consumption.For that productivity, Europe paid in termsof gold and in 1950 when all the dust hadsettled, the United States held 76% of theentire official world gold reserves. This fac-tor would serve as the primary reason whythe U.S. dollar would gain world domi-nance from 1950 onward.

Again, immediately following the war,many commodities were in short supply andthe reconstruction which was anticipatedled to much immediate postwar speculationgoing into 1946. But this was nowhere assignificant as that which followed WorldWar I preceding the panic of 1920.

Following the early 1946 high, a recessionperiod set in as trade declined and govern-ment spending for armaments decreased.The trade surplus expanded in the United

States during 1947 but much of this was forraw materials and civilian goods. The stockmarket regained about 50% of its loss fromthe high in 1946. But the economy wasshifting from war to peace and this tooksome readjusting on the part of industry.

There are several points which should bemade in respect to the rally in the stockmarket between 1942 and 1946. We haveread how during the rally of 1933-1937, theattitude toward the market was one of ahedge against inflation. It is important toour understanding of market behavior thatwe look at the inflationary aspects of the1942-1946 period as well. The followingtable compares the Producer Price Indexeson an international basis. Roosevelt’s cur-rency inflation actually exported inflationto other nations, which prompted the battleof devaluation practices.

Producer Price Index 1932-1942 1932 1942 % Chg

U.S. 12.5 19.0 + 52%

U.K. 4.1 7.6 + 85%

France 0.61 1.9 + 211%

U.S. Balance of Trade with Europe

in m

illio

ns o

f dol

lars

in millions calculated by value

192919301931193219331934193519361937193819391940194119421943194419451946

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

0


499

Italy 0.26 0.55- + 111%

Japan 0.10 0.23 + 130%

The above table illustrates that inflationwas varied from one nation to another. Butthere is no question that the 1932-1942 pe-riod was one of inflationary trends. Thecurious factor is that although governmentspending continued between 1936 and1942, the economy itself had entered a re-cession. Therefore, the concept that gov-ernment could increase its spending tostimulate the economy did not unfold assome would like us to believe.

The economy finally improved in theUnited States in response to the huge in-crease in foreign buying due to the war asreviewed in the previous table on TradeSurplus from 1941-1947. The effects ofWorld War II on the inflationary picture arequite clear. Between 1936 and 1946, infla-tion rose much greater than in the 1932-1942 per iod. The following table ofProducer Price Indexes illustrates this quitebluntly.

Producer Price Indexes 1936-1946

1936 1946 %Chg

U.S. 15.5 23.2 49.6%

U.K. 4.6 9.2 100%

France 0.60 6.0 1,000%

Italy 0.29 10.4 3,486%

Japan 0.12 2.0 1,566%

Inflation in the United States was not thatdramatically different in the 1936-1946 pe-riod compared to the 1932-1942 period.The prewar period posted a 52% inflationrate while during the war, when price con-trols and rationing were employed, infla-tion actually declined to 49.6%. Still thiswas a sizable gain in inflation for this warperiod. It did not hamper the stock marketfrom rallying whatsoever. The Europeansituation was much more different when wecompare the previous inflation tables. InBritain, inflation rose from 85.3% in theprewar period to 100% during the 1936-1946 era. In France, inflation rose from211% to 1,000%, while Italy bore perhapsthe largest brunt of inflation, jumping froma prewar rate of 111% to 3,486% during the1936-1946 period.

Accumulative Inflation 1932-1942

Per

cent

age

Rat

e of

Cha

nge

CPI 1980=100

US UK France Italy Japan

140.00%

130.00%

120.00%

110.00%

100.00%

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%


500

Accumulative Inflation 1936-1946P

erce

ntag

e R

ate

of C

hang

eCPI 1980=100

US UK France Italy Japan

3200.00%

3000.00%

2800.00%

2600.00%

2400.00%

2200.00%

2000.00%

1800.00%

1600.00%

1400.00%

1200.00%

1000.00%

800.00%

600.00%

400.00%

200.00%

0.00%


501

If we look at the stock markets in Britainand the United States, we can see clearlythat it was the U.S. market which offeredthe hedge against worldwide inflation onceagain.

Industrial Stock Indexes

Adj.

1936 1946 %Chg for Infl.

U.S. (Dow) 160.00 180 .00 12.5% (-36.9%)

U.K. 11.2 11.9 6.25% (-93.7%)

(Dow in terms of pounds)

Pound Avg 4.971 4.03 (18.9%)

Dow in terms of pound 31.4% (-17.9%)

The above table introduces the concept ofhow the U.S. market appeared to the Brit-ish investor seeking a hedge against infla-tion. Although the Dow Jones Industrialsrose only 12.5% in the face of 49.4% do-mestic inflation, the sharp rise in the dollaragainst the pound, 18.9% with exchangecontrols, actually increased the value of theDow by 31.4% in their eyes, ignoring theinflationary considerations. Taking into ac-

count the inflationary trends in the UnitedStates, the Dow Jones Industrials declinedin terms of pounds by only 17.9% comparedto the British stock market, which declinedby 93.7% after adjusting for British infla-tion.

For some reason, the majority of analystsin the United States have lived in a fish bowlof isolation. They have formed their con-clusions based upon domestic considera-tions. The rise in the stock market between1942 and 1946 was not outstanding in termsof dollars versus inflation. It managed toexceed the 1936 high of 193 by reachingonly 212 in 1946. Some would definitelypoint to this period as evidence that thestock market does not prosper during peri-ods of inflation. But to the contrary, it atleast rallied and moved to new highs. Froman international perspective, the dollar wasrising in international purchasing power.Even though U.S. domestic accumulativeinflation was 49.4%, Its purchasing poweragainst a basket of currencies, including thefranc, lira, yen and the pound, increased

Comparison U.S. & U.K. Stock Markets

Ann

ual R

ate

of C

hang

e

US = S&P 500 UK = FT Index

1930 1932 1934 1936 1938 1940 1942 1944

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%


502

31.8%. Therefore, $100 in 1936 would havepurchased nearly $132 in foreign goods dur-ing 1946. Therefore, let’s create a basketbasis 1949 and compare it to 1929.

Dow Jones Industrials Expressed

in a Basket of Currencies

1929 1949 % Change

Pound $4.857 $3.680 (24.2%)

Franc .039 .003 (92.3%)

Lira .052 .001 (98.0%)

Yen + .460 .003 (99.3%)

Basket (X) 5.408 3.687

(X+ 1/5) (Y) 1.280 .937

(1/Y)= I .78 1.06

Dow Ind 386 212

(Dow x I) 301 225 (25.2%)

The basket in the above table was createdwithout weights. I obtained the sum of thefour currencies and added 1 to representthe dollar and then divided by 5 which gavethe figure "Y." I then divided 1 by "Y" toestablish a unit of international value "I"which is easier on the eye to comprehendfrom the U.S. perspective. In 1929, thatinternational unit of value was equal to 78cents so to speak. In 1949, it was worth$1.06. Therefore, this illustrates the overallappreciation of the dollar itself during this

20 year period. Then taking this figure andsimply multiplying it against the Dow, weobtain an adjustment in terms of interna-tional purchasing power. This exercisedemonstrates that purchasing power be-tween the international Dow was only25.2% less than the 1929 high, whereas, incontrasting terms the Dow was still 45%below the 1929 high.

Much of the real inflation never hit homeduring the 1940s. This was largely due tothe fact that a fair portion of the debt wasresulting from foreign loans which againwere being floated through U.S. bonds.The following table illustrates the impact ofgovernment spending and the lag in infla-tion on a percentage basis to the rise in thenational debt.

Fed Budget Wholesale National

Surplus (-) Price Ind Debt

($mil) (1967= 100) ($bil)1937 (2,777) 44.5 36.4

1938 (1,177) 40.5 37.2

1939 (3,862) 39.8 41.9

1940 (2,710) 40.5 45.0

Fed Budget Wholesale National

Surplus (-) Price Ind Debt

($mil) (1967= 100) ($bil)

1941 (4,778) 45.1 57.9

U.S. Stock Market Expressed in Pounds

Exp

ress

ed in

Brit

ish

Pou

nds

S&P 500 / British Pound Annual Avg

1900 1910 1920 1930 1940 1950

7

6

5

4

3

2

1

0

U.S. Stock Market Expressed in Dollars

Exp

ress

ed in

U.S

. Dol

lars

S&P 500 Index (1980=100)

1900 1910 1920 1930 1940 1950

22

20

18

16

14

12

10

8

6

4

2

0


503

1942 (19,396) 50.9 108.2

1943 (53,812) 53.3 165.9

1944 (46,138) 53.6 239.6

1945 (45,022) 54.6 278.1

1946 (18,201) 62.3 259.1

1947 6,600 76.5 256.9

1948 8,864 82.8 252.8

1949 1,006 78.7 257.1

1950 (2,207) 81.8 256.7

Upon Roosevelt’s death in 1945, Trumanimmediately attempted to end the infla-tionary policies of his predecessor. This isevident by the sharp reduction in the fiscaldeficit for 1946 and the immediate returnto surplus during the years of 1947-1949.The national debt came to a screeching haltand did not exceed the 1946 high until theearly 1950s.

Much of the inflation in the United Stateswas highly controlled by Roosevelt. Thearmy actually seized the gold mines and allproduction was under government man-agement. Rationing and strict price con-trols sheltered much of the domestic

economy from the real inflationary trendshidden in the national debt.

In the midst of all this chaos, the UnitedNations managed to put together an eco-nomic summit during July 1944, held atBretton Woods, New Hampshire. It was atthis conference that the theory of manipu-lating foreign exchange rates, such as thoseof the central banks back in 1925-1927 andthe devaluation practices of Roosevelt,were attacked. Bretton Woods broughtforth the establishment of the World Bankand the International Monetary Fund(IMF). Although the war was not yet over,the member nations sought to look forwardto the economic problems which would facethem once the war had come to an end.

The monetary system that was formulatedat Bretton Woods was based upon a pledgefrom all member nations to keep their cur-rency within a percentage point or to anagreed dollar value. The IMF was designedto provide moral suasion and credit to keepthe system alive.

Differential US Natl Debt & PPI

(Natl Debt % Chng - PPI % Chng)

annu

al %

rat

e of

cha

nge

diffe

rent

ial Rate of Growth of Debt over Inflation

1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%


504

But the economic problems could not beswept away by Bretton Woods. In Britain,the national debt had risen from 7.2 billionpounds in 1939 to 23.7 billion pounds in1946. where it was absolutely necessary,rationing and campaigning to promotelending to the government. Through thesemeasures, excess capital was absorbed bygovernment and not used by the privatesector for speculation, or investment ex-pansion. In one sense, it was like a commu-nist state where most of the capital andprofits are absorbed by governmentthrough strict controls which hold off infla-tion on domestic products at the very least.

Another step taken both in Britain and inthe United States was the "official" manage-ment of interest rates. In Britain, the bankrate had jumped to 4% in 1939. But this wasbrought down to 2% and remained thereduring the war. The normal forces of sup-ply and demand were simply not permittedto work. This is why interest rates did notrise in response to the huge borrowing ongovernmental levels in both Britain and theUnited States.

Had there not been a commitment on thepart of the public to stand behind theirrespective governments, these practiceswould not have worked. It would be dan-gerous to assume that this could have beensuccessful under peacetime situations. Thepublic spirit was directly behind the war andsacrifices were given in full knowledge thatwhen it was over, things would return tonormal. Some argue that since it workedonce, it would work now to solve our eco-nomic problems. But this is merely a com-munistic idea disguised among economicprinciples. People were deprived of theirfruits from labour and to suggest that strictprice controls, higher taxation, and hugegovernment spending for social programscan be maintained indefinitely is pure mad-ness. These are the grounds for revolution

British Pound 1900-1950


U.S

. dol

lars

per

Brit

ish

poun

d

MONTHLY CLOSINGS

1900 1910 1920 1930 1940 1950

5.20

5.00

4.80

4.60

4.40

4.20

4.00

3.80

3.60

3.40

3.20

3.00

2.80

Great Britain

Per

cent

age

Rat

e of

Cha

nge

Accumulative Changes 1939-1946

CPI M1 Natl Debt

240

220

200

180

160

140

120

100

80

60

40

20

0

British Treasury 3 Month Bill Rate

Per

cent

age

Rat

e of

Inte

rest

1936 1938 1940 1942 1944 1946

1.4

1.3

1.2

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0


505

and indeed, they are some of the very rea-sons the colonists revolted against Britainback in 1776. Nonetheless, government didnot relinquish all of its usurped power. Al-though Federal rent control was abolishedafter the war, some states such as New Yorkdid not. Eventually the State of New Yorkdropped rent control, but the City of NewYork still maintains that power to this veryday.

Early on in the War, drastic steps weretaken on the part of Britain to help financethe huge expenditures. Britain "requisi-tioned" investments overseas, including thebusiness operations of British insurancecompanies. Between 1940 and 1941, Brit-ish investments in the United States weresold for 200 million pounds. Another 225million pounds worth of investments weresold to Canada. In addition to these sales,Britain borrowed 425 million pounds fromthe Reconstruction Finance Corporation(RFC) in the U.S. which had originally beenestablished by Hoover to support the bank-ing industry. Despite all of this borrowing,the reserves of dollars and gold held by

Britain in 1939, which amounted to 606million pounds, declined to 75 million bythe end of 1940.

Even after Bretton Woods the problemscontinued. After Roosevelt’s death, Tru-man cancelled the Lend-Lease program.This magnanimous lending policy for Brit-ain was explained to the American peopleby Roosevelt in simple terms. Basically, hesaid, if your neighbor’s house is burningdown, you should not bargain with him fora fee. You should put out the fire first. Thiswas Roosevelt’s clever way of lending vastsums to rebuild Britain. When Truman can-celled this blank check, the new govern-ment o f C lement At t lee , which hadpromised sweeping social programs and re-forms to the British population, was leftwith the balance of payments completelyuncovered.

Attlee had not made the grave mistakesof Cunlife following World War I. Attlee’sgovernment at least viewed the pound asmerely a unit of account, and he disassoci-ated himself from the traditional pride of

Great Britain - Current Account


in m

illio

ns o

f pou

nds

in millions of pounds

1927 1930 1933 1936 1939 1942 1945 1948

200

100

0

-100

-200

-300

-400

-500

-600

-700

-800

-900


506

the British to maintain the old $4.86 parvalue at all costs. The pound was still con-trolled for internal purposes, but its valueon the international markets was now atrisk. If it declined severely, the desperatelyneeded imports for the reconstructionwould rise in cost. This was the dilemmawhich faced Attlee in the first few monthsof his administration.

A delegation headed by the famouseconomist, John Maynard Keynes, left Brit-ain for Washington. In September 1945,Keynes arrived in Washington with a hugeshortfall in Britain’s external account whichhad to be covered. Keynes had estimatedthat he needed to go home with 1.7 billionpounds just to break even by 1949. He wasshooting for a loan of 1.5 billion pounds orroughly $6 billion. He asked that a largepart of this sum be merely a grant and thatthe U.S. should not expect to be repaid. But"give’em hell Harry" was not in the moodfor any free handouts. After three monthsof negotiation, Truman sent Keynes homewith $3.75 billion, nearly half of what

Keynes was looking for. But the entireamount was considered not a grant, butstrictly a loan, carrying an interest factor of2%. Canada added another 280 millionpounds under similar terms.

Truman had attached to his loan two stipu-lations. The first was that the pound wouldbe made completely convertible into for-eign currency and exchange controls wouldbe lifted within one year. Second, the pro-ceeds from the loan could not be used to payoff Britain’s wartime debts. This stipula-tion was attached based upon a theory ofthe "International Dream," as I havedubbed it. The concept was that if theUnited States loaned money for the recon-struction of Europe and Japan, that thereemergence of their economies would be-come viable markets for U.S. goods. Thisin turn would keep employment high in theUnited States and hopefully avoid the nor-mal postwar depression phase. Truman wasnot the only man to conceive of this dream.It was essentially the goal following WorldWar I with the huge influx of foreign loans

British Pound 1900-1950


U.S

. dol

lars

per

Brit

ish

poun

d

MONTHLY CLOSINGS

1900 1910 1920 1930 1940 1950

5.20

5.00

4.80

4.60

4.40

4.20

4.00

3.80

3.60

3.40

3.20

3.00

2.80


507

and the goal of the Central Bankers back in1925-1927.

Today we still chase the illusive interna-tional dream through the very structure ofour new modern system for the interna-tional economy. Many believe that we haveachieved it at brief moments in history.Ironically, man has scoured the earth insearch of wealth and stability. He has as-sumed that everyone can prosper and livehappily ever after simultaneously aroundthe globe. He has been torn between thecontrasting theories of communism andcapitalism in his pursuit of his dream andoften he has struck down the very fruits offreedom to achieve his goal. But every ide-ology from capitalism to socialism has itsweakness.

There is one element which has beenlargely ignored in economics and in theanalysis of the events of the Roaring 20s andthe post-World War II era. The rise and fallof the world’s monetary system was primar-ily caused by a tremendous experiment ininternationalism which failed. That experi-ment has taken the form of manipulation inforeign exchange rates, interest rates andtariffs all in an effort to achieve equalizedprosperity. Even now in this age, the Groupof Five nations, led by the Secretary of theTreasury Baker, is making the very samemistakes as Benjamin Strong made in 1925.

In Herbert Hoover’s memoirs on Page 85of Chapter 12 on Foreign Loans, he beginsby saying: "A part of the whole program ofexport expansion revolved around the pro-vision of loans or credit to foreign enter-prises and governments with which to buyAmerican products." Indeed, this was thephilosophy, the great international experi-ment which began in the aftermath ofWorld War I and became the doctrine in thepost-World War II era as well. The concept

was simple. During the War, America washard at work producing food which keptEurope alive. We produced many armswhich Europe purchased. Americans werehard at work and Europeans paid in gold forthe products. At the end of the War, theU.S. gold reserves had swelled to recordlevels. But American workers were unem-ployed since Europe no longer needed itsmilitary productive capabilities.

The great international experiment beganat that time following World War I. Oneway to keep Americans working was tomaintain the high levels of exportation.America had become addicted to it. Ratherthan focus upon the domestic revitalization,the focus was placed upon foreign exports.The concept of lending money to Europewith which they would then in turn buyAmerican goods sounded very nice. Itwould raise the levels of employment, sothe administrators believed.

However, Hoover was very astute and inhis memoirs he continued on the subject asfollows:

"In 1920 and 1921 the foreign govern-ments and business were slow to realize thatour era of taxpayers’ largess was over; butby 1922 they came to understand it, and thewhole problem took another complexion.A boom began in foreign loans with theoffer by foreign countries of extravagantinterest to private lenders, from 5 to 8 percent per annum.

"These loans soon began to raise disturb-ing questions as to their security, their re-productive character, and the methods ofpromotion. To serve any good purpose,such loans had to be adequately securedand should increase the productivity of thecountry of their destination. Out of suchincreases alone could they be repaid. Loans


508

used for military purposes, for balancingbudgets, and for nonproductive purposesgenerally would be disastrous."

Hoover’s comments offer some keenwords of wisdom. If foreign loans wereused for balancing budgets forced into defi-cit by social programs or military expendi-tures, the re would be lit t le hope ofexpecting repayment.

In order for those foreign loans to be loanswhich would have been repaid, they mustproduce income. That income, in turn,must come from another foreign nation.Let us simplify the situation by reducing theworld down to three people. The first rep-resents Europe, the second the UnitedStates, and the third Asia. Let us now intro-duce the element of money. There are only12 ounces of gold in the world evenly dis-tributed, which means that each has 4ounces. Asia and Europe go to war but theU.S. produces all the supplies for Europe.Europe pays the U.S. 4 ounces of gold andnow has no gold left. The war is over andnow the U.S. has 8 ounces. It lends 4 backto Europe so that Europe will spend that onU.S. goods. So for a while this goes on andthe U.S. now has 6 ounces plus a note fromEurope that it owes it 4 ounces. The onlyway Europe can repay the 4 ounces is byselling goods to the U.S. for which it will bepaid in gold. If that takes place, then theU.S. will decline in its exports and cries forprotection from foreign imports will beheard from its people.

Therefore, the great international experi-ment failed. The United States could notexpect to rebuild the world while expandingits own. When Europe essentially de-faulted along with South America on itsloans from the United States, capital losseswere suffered both on a Federal level aswell as on a private individual level. Thus

the Great Depression in part was caused bymuch of the defaults of the time. Studiesclearly illustrated that when South Americadefaulted on their bond issues, much of thatwas held by private investors and not banks.They could not write off losses against re-serves. The losses were real and to thepoint. Thus, these events struck hard at thevery spirit of the population. Those whohad not speculated in stock yet believed theadvertising that stated bonds were the "safe"investment, may have survived the crash ofthe stock market but not the crash of thebond market. Those who had tucked theircapital away in real estate were wiped outby the lack of liquidity caused by the dom-ino effect from the stocks and bonds. Thegreat international experiment to lendmoney to the world in an effort to rebuildtheir economies as a viable market for U.S.exports backfired and created the GreatDepression.

Today we still seek to achieve this "Inter-national Dream." Following World War II,the very same philosophy took hold and theUnited States once again lent its capital torebuild Japan and Europe. In more recenttimes, Europe has joined in this pursuit andlent much of its capital to foreign nations inthe third world. Now they too suffer at thehands of other nations.

As we look at the remaining period fol-lowing World War II, we will see thatRoosevelt’s abandoning of the gold con-vertibility in 1934 had a very profound im-pact upon the future of the world. In theUnited States, the lack of convertibility ofgold for domestic U.S. citizens acted as amask hiding the true economic shift ofwealth and the cost of the ‘InternationalDream" to the United States. Under a fullgold standard, if government spending gotout of hand, the people would sense this andif they lost confidence in the government’s


509

ability to meet its obligations due to dwin-dling gold reserves, panic would normallystrike.

Under Roosevelt’s limited gold standard,he successfully eliminated the domesticgold panics by simply outlawing gold own-ership. Thus, government spending couldcontinue and over the long-term inflationof goods resulted. Thus, private invest-ments would rise sharply in varying cyclesof popularity. Panic dumping of dollars andbuying of goods, or a commodity or at timesstocks replaced the old panic into gold. Aslong as government did not back its cur-rency with condominiums or shares of G.M.or bushels of wheat, such panics in the post-World War II era did not create a run on theTreasury. Therefore, Roosevelt’s limitedgold standard did manage to eliminate thecrisis in currency which had existed sincethe days of the revolution.

Those who criticize the gold standard willalways point out this drastic departure. Butwhat they fail to realize is that although theRoosevelt limited gold standard may haveeliminated the domestic gold panics, itmerely allowed government to spend hugesums of money it never had without anyimmediate consequence on the domesticpolitical scene. As a result, we will see howvarious investments as well as currenciesand even bonds at various times have re-placed gold in so far as the medium intowhich panic is focused. The elimination ofgold convertibility has not eliminated man’semotional tendency for financial panic.

In 1950, the United States held 76% of theentire official world gold reserves. WhenPresident Nixon was forced to abandon thegold convertibility of the dollar for foreignnations, the U.S. reserves stood at 23%.Roosevelt’s limited gold system may havesheltered the domestic economy for a

longer period of time, but that was notachieved without a cost. Gold panics be-tween nations still took place. As theUnited States lent vast sums of dollars un-der the theory o f the "Internat ionalDream," there were no stipulations thatthose dollars could not be handed back forgold bullion at the Treasury. In the mid-1960s, the press began to talk aboutFrance’s apparent distrust of the dollar anddesire for gold. France was the largest with-drawer of gold from the U.S. Treasury dur-ing that period. The lack of confidence byforeign nations led to massive withdrawalsuntil Nixon was forced to close the goldwindow to allow the dollar to "seek its ownlevel."

By 1971, most Americans had no conceptof what those words even meant. To them,a dollar bill still looked the same. Mostwere very young when Roosevelt had takenoffice and few were alive who would haveremembered the terrible consequences ofwildly fluctuating foreign exchange. An oldproblem had reemerged in a generationthat had grown up completely oblivious tothe idea that money was in reality anothercommodity. Its price had merely been fixedfor 35 years in the same fashion that OPECattempted to fix the price of oil. Eventuallyno matter who it is, the free market forceswill emerge victorious.

It is ironic that some who have a long listof fancy degrees in economics have donetheir best to contrive a means around real-ity. If we reduce the "International Dream"down to a simple example, we can seethrough all its fallacies. Let us take sevenpeople and let each represent a nation orgroup of nations (Britain, Canada, France,Germany, Japan, U.S. and Mexico). If weassume that each person has $10 and oneperson decides that he wants to producesomething that the others will buy so that


510

he can make a profit, then if all the moneyin the world only amounts to $70, obviouslythat is the maximum that any one personcould have. So let us say that this person isJapan and he has invented a car. All theother people would like to buy one so theydo and pay Japan $1 each. So Japan has $16and the remaining people in the world have$9 each. In order for Japan to have earnedthat profit, the other nations had incurred a"trade deficit." You can see clearly now thatit is impossible for all seven people to earna profit. Not all nations can have a tradesurplus simultaneously.

The trade game can become more com-plicated when the players are no longer tiedto a fixed amount of money. When they allagree that they will no longer use dollars buteach will now issue its own currency, weintroduce the element of inflation. But ifone nation, for example, Mexico, has notrade surplus and instead it continues toprint pesos, the others automatically beginto discount Mexico’s currency. They losetheir confidence in Mexico’s ability to re-main as a player in the game. When thereis no tangible item being used for moneyand all that is used is merely paper currency,then the value of those currencies swingback and forth on a factor of confidence.This we know is true today and I have illus-trated how the currencies have swunggreatly between 1920 and 1924 based uponeverything from war to new political elec-tions and fears of political actions.

Therefore, the concept that all nations canprosper simultaneously is absolutely ab-surd. Yet at the same time, a trade surplusis the goal of every nation. But when onenation lends to another and that nation re-fuses to repay, the net effect is quite simple.In the case of the United States, it hadacquired 76% of the world’s official goldreserves by producing food and arms for

Europe. If the U.S. lent $100 to Europe,$100 to Japan and $100 to the third world,and those nations indeed bought U.S. goodsand kept Americans working, then at 8%interest, those nations will double theirdebt to the U.S. in just 9 years. Therefore,unless they swing the trade against theUnited States in equal proportion to thedebt, they will never be able to repay thoseloans. If they are successful in obtaining atrade surplus, then the U.S. will have a tradedeficit and the objective of employment forthe U.S. is lost in the end. If they are notsuccessful in turning the tide of trade andcontinue to maintain a trade deficit or asurplus which is not sufficient to repay theinterest, then they will eventually default.In that case, all the labour of the U.S., whichcreated the goods sold to the other nationsthrough credit, go unpaid. If there is onescience that is not based upon theory butreality, it is mathematics. 1 + 1 will alwaysequal 2, no matter how hard a politician oreconomist may try to turn it into 3.

In the reality of international default, theworld is faced with several factors. If a na-tion cannot meet its obligations and thecreditor nation merely lends additional


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capital so that the debtor can then take thenew funds and pay the interest on the olddebt, the bottom line effect is to merelypostpone the eventual default. The publicwho has been paid for its labour has in-vested in various mediums including itshomes. On the surface the labourer be-lieves that he has profited as his house hasrisen substantially in value but in reality ifhe sells that house, he will find that hecannot buy a new home of similar qualityand size. His savings depreciate in valueaccording to the level of inflation that takesplace. If goods are merely produced andgiven away without true tangible repay-ment, the deficit is made up by governmentspending and accumulated debt. In turn,government raises taxes and the labourerends up repaying what he had received forhis own labour, which government chose togive away. Daniel Webster once said: "Ofall the contrivances for cheating the labour-ing classes of mankind, none has been moreeffective than that which deludes them withpaper money."

One can make two cases of this situation.The argument that money should be some-thing tangible like gold has carried a lot ofweight in some circles. But the rigidness ofsuch a system does not allow for imbalancesto go on for extended periods of time. Thebooks must be balanced. Thus, it may havea tendency to promote more panics or crisesas long as fiscal irresponsibility on the partof government is a way of life. Waves ofinflation under the gold standard are di-rected by new discoveries of gold. Thus theinflationary wave in the 1850s caused by theCalifornia discoveries and the Spanish con-quest of the Americas in the 1500s are clas-sic examples. At times, the rigidness of thegold standard promoted war for the objectof profit, or in modern terms increasedmoney supply. This has been a favorite mo-tive long before the days of Alexander the

Great and, in fact, was a primary reason forthe American Revolution:

"No taxation without representation!"

Those who argue that a gold standardwould force responsibility upon govern-ment to contain its spending forget thatgovernments were irresponsible under thegold standard as well. Adam Smith wrotethe modern textbook of all time on thesubject of economics. In 1776, he publishedhis "Wealth of Nations" in which he statedthe following:

"It is the highest impertinence of kings andministers to pretend to watch over the econ-omy of private people and to restrain theirexpense, either by sumptuary laws, or byprohibiting the importation of foreign luxu-ries. They are themselves always, and with-out any exception, the greatest spendthriftsin the society. Let them look well aftertheir own expense, and they may safely trustprivate people with theirs. If their own ex-travagance does not ruin the state, that oftheir subjects never will."


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Those who argue that the gold standard isa barbarous relic of the medieval days formaintaining reserves, do so only to promotethe system of blank checks. Under the pa-per system the panics have not been elimi-nated. The frequency of the panics seemsto be returning to the pre-1934 days. Underthe limited gold standard between 1934-1971, those panics were not as noticeablenor as drastic. Most crisis situations tookplace between the treasury of one nationversus another and the domestic economieswere spared the knowledge and the fears.

From the government’s perspective, theadvantage of the total paper standard lies inthe fact that government does not have towait for new gold mines to be discovered inorder to increase the money supply. Allthey need do is pass an act of Congress toextend its debt limit so it can increase themoney supply. Eventually the laws ofmathematics and the natural forces of hu-man nature itself will undermine the confi-dence in the paper system and it willcollapse just as easily as it did under the goldstandard. The swings in foreign exchangeduring the period we have reviewed in thisstudy closely paralleled the swings in theinvestment world as confidence compelledinvestors to flee from one currency to an-other, thereby affecting the various stockmarkets around the world.

The Great Depression was not inventedby the stock market. It was created by theforces of unsound international finance andsumptuary laws imposed upon the subjectsof various nations both in the United Statesand in Europe. There is no doubt that thefate of the stock market in the future will belargely dictated by the swings in confidencewithin the international monetary system.Unaware domestic investors and analystsmay attribute the current rise in the marketgoing into the summer of 1986 to expecta-

tions of lower interest rates, but with hind-sight this will prove in the end to be a totallyerroneous explanation of what took placein the late 1980s.

In conclusion, the fundamental explana-tions of the ups and downs of the stockmarket and the world economy cannot besimply drawn between an inference withinterest rate actions or with corporate earn-ings. The impact of public confidence is byfar the most profound influence in both theinvestment world as well as the world econ-omy. Capital flowing back and forth be-t we e n n a t io n s a ffo r d s t h e clo se strelationship with the movement within thestock market and this perhaps can be mostreadily seen through the movement of for-eign exchange markets as well. The issuesare never purely domestic. No matter whatmarket one may look at in whatever nationyou may reside, the international influenceswill always be a subtle guiding force behindthe more illuminated domestic issues of theday.


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A technical review of the trading patternsof the Dow Jones Industrials prior to

1940 reveals several interesting notes whichshould be remembered. The chart abovecovers the yearly activity between 1897 and1940. This chart provides a few technicalpatterns which are not only interesting, butalso vital to a technician’s perspective. Thepatterns take place in various commodities,interest rates and whatever involves humanemotion and interaction. If it is somethingthat can be charted, then these aspects willapply.

I have drawn on this chart two simplestandard technical lines. The first is labeledthe Uptrend Line and its construction wasaccomplished by tying together the two ex-treme low points on this chart. Thesepoints were the price lows of 1897 and 1903.We can see that from there onward thegeneral activity of the market held abovethis technical support area. The panics of1907 and the panic sell off of early 1915

both managed to support above this line.You will note that it was not until 1932 whenthis technical support line was violated.

Quite often, many students of technicalanalysis view a break of the Uptrend Lineto be something indicating extreme bear-ishness. In fact nothing can be further fromthe truth. Normally major lows in a markettake place when the long-term UptrendLine is violated. The major low quite oftenlies somewhere just below. Look at theprice action which took place in 1933. Youwill notice that 1933 opened below the Up-trend Line, but it managed to penetrate iton the upward movement that followedduring the inflationary expectations underRoosevelt.

If a break of the Uptrend Line is indeedthe sign that the market will continuesharply lower, then a subsequent rally mustmove back up to test the Uptrend Line, andthen fail to exceed it. In other words, it will


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bounce off the Uptrend Line and then if itdrops below the previous low, then the mar-ket is in real trouble. But when a major lowis forming, the Uptrend Line is normallypenetrated and then the subsequent rallygets back above the Uptrend Line as wasthe case in 1933.

To help illustrate this normal technicalreaction, I have drawn two additional Up-trend Lines marked # 1 and # 2. Line # 1was constructed by tying the lows of 1921and 1924 together. Here you will noticethat during 1931, the market penetratedthis Uptrend Line and there was no rallyback to even attempt to test it on a yearlylevel. This is the indication of a very bearishatmosphere. Obviously, the market contin-ued to collapse into 1932. But take specialnote of the rally which came about into apeak during 1937. Note that the high of1937 stopped dead, bouncing off of thisUptrend Line # 1. This is the type of pat-tern which indicates that the market hasmerely made a reaction and that a furtherresumption of the downtrend will unfold.Indeed, the market fell back to UptrendLine # 2, which was constructed by tyingtogether the lows established during 1932and 1933. Had this Uptrend Line # 2 beenbroken and a test or rally back up to itbounced off as was the case at the 1937 high,then perhaps we would have dropped backto test the 1932 low once again. But themarket held the Uptrend Line # 2 and sub-sequently a consolidation phase developedto bring about a renewed uptrend into theyears ahead.

Another important factor about this chartis the use of the Downtrend Line. This lineis constructed by tying together the highsmade during 1929 and 1930. Just as themarket remained above the major UptrendLine from 1897 all the way into the 1929high, indicating that an uptrend was still in

motion. But note that the market remainedbelow the Downtrend Line during 1930,1931 and 1932, indicating that a downtrendwas still in motion as well.

The importance of this downtrend line isperhaps even greater in the determinationof whether or not a major low is in place.Note that during 1933, even though themarket opened below the Uptrend Line, itopened above the Downtrend Line. Thesetwo lines therefore served a purpose of fo-cusing our attention on a major junctionwithin market activity. Note that the 1933price low actually bounced off the Down-trend Line. Again, just as the 1937 highbounced off the Uptrend Line # 1 indicat-ing that "resistance" had been encountered,the market bounced off the DowntrendLine indicating that "support" had been en-countered in 1933.

This is the value of technical analysis. Wehave reviewed the countless fundamentalswhich were a part of the day-to-day situ-ation through the 1921 period up to 1940thus far. Trying to determine where themarket was headed based upon fundamen-tal assessment of the events surroundingthe market was not always a clear-cut case.Confusion was prevalent and we read howmost analysts had remained bear ishthroughout the 1921 era up even into 1928.We read how when Jesse Livermore pub-licly stated that he was bullish, he was ac-cused of trying to talk the market higher tohelp Coolidge get re-elected. Technicalanalysis smooths out all the bumps, ignor-ing these sorts of comments by providingpure unbiased guidance.

Although technical analysis can be ap-plied to gold, cotton, wheat, interest ratesor the retail sales of any company, eachmarket or indicator does retain a certainuniqueness. Although the general princi-


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ples of technical analysis may be applied toanything that can be charted, the actualpatterns of a given market may not be thenormal patterns in another.

Referring once again to the annual chartfrom 1897 to 1940, I have marked out fourrallies prior to the major top in 1929. Partof the reason why many analysts were bear-ish in 1924 when chastising Livermore is thefact that the market had tested the 100 areafour times before and subsequently failedby dropping at times as much as 50% in theaftermath. Because people had beenburned four times before, they remainedskeptical when the market began to ap-proach that lofty 100 area in 1924.

Take note that four tests of that 100 areahad taken place. Each high was slightlydifferent from its predecessor, but each hadbeen followed by a sharp collapse the yearthereafter. Now let us look at the MonthlyChart # 1 covering the period of 1921 to1932. Note that during the early stages, themarket once again, on a monthly level, at-tempted to test the 100 level four timesbefore successfully pushing through it in1925. Whatever pattern you find on onelevel will also exist in all others. Thatmeans that the patterns on a yearly chartwill be repeated within a monthly, weekly,daily or even intraday chart pattern. Thegeneral patterns are actually like a brain-wave. Each person has his own distinctlydifferent brainwave pattern and such is the


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case with markets themselves. The pat-terns that we are looking at here will berepeated during the 1960-1970 period whendealing with the 1,000 point level of theDow. The classic four attempts apply to thestock market but not necessarily to gold,copper or bonds for that matter.

Let us look at the Uptrend Lines on thismonthly chart. Here we can see that themajor Uptrend Line was penetrated during1931. On a monthly level the market ralliedback to test it, but failed to close above it.Take note of the minor Uptrend Linemarked # 1. Here the panic collapse ofNovember 1929 punched through it, butfailed to close back below it. That indicatedthat the market was ready for a consolida-tion phase before resuming any continueddowntrend. But after the recovery of early1930, the market turned downward againwith a vengeance. It closed below the Up-trend Line # 1 and for the next two monthsit attempted to close back above it withoutsuccess. That was the test which indicatedthat one had better be out of there from thelong side.

You might be thinking that perhaps this iseasy to talk about in hindsight, but that isnot true. This same form of analysis appliesto current trading activity and if you look forthis type of testing pattern, you will find thatit works every time. Once the previous lowis penetrated, then you have the confirma-tion that the trend should press lower in thenear future. Caution is advised when youarrive at a junction such as the case betweenthe Downtrend Line and the Uptrend Lineon the annual chart during 1933 as we re-viewed earlier.

Now take note of the Downtrend Line.This line was the last Downtrend Line con-structed by tying the 1929 high to the Sep-tember 1931 high. You may ask what about

the previous highs between these twopoints and why didn’t I use those instead?The answer is that I did. But the marketkept pushing through those DowntrendLines periodically, but kept failing. Thiswas the final Downtrend Line, and for rightnow this is the one we are concerned about.The others we will discuss shortly.

Note here that the market finally ex-ceeded this Downtrend Line during themonth of the major low in 1932. It alsomanaged to close above it. Note that thepattern is one of a testing pattern in respectto this Downtrend Line. Exceeding theDowntrend Line intraday is not a major buysignal. But the pattern clearly displayed atendency to continue higher rather thanlower. Therefore, the market successfullyaccomplished a test of the Downtrend Linefrom the upside downward. That was thetest which signaled that the market wascoming to an end insofar as the downtrendwas concerned. Most major downtrendscome to an end by testing the final Down-trend Line taken from the major high.

Now let us try to answer that questionabout how do we know which points weshould use to create the Downtrend Line.The Monthly Chart # 2 illustrates the firstDowntrend Line. This line was constructedby taking the 1929 high to the 1930 recoveryhigh. Looking at this chart we can see thatthe market remained below this Down-trend Line until the February rally of 1931.Everyone was quite bullish if you recall withmany prominent people going on recordsaying that the depression and the down-trend had finally come to an end. But therewas no follow-through during March of1931 as the market fell back gravitatingtoward the 1930 lows. It was April of 1931when the major Uptrend Line was brokenslightly, but at month end the final bell hadrung when the market lacked enough


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strength to close back above it. This con-junction of testing the Downtrend Line andpenetrating the Uptrend Line could havebeen a technical bottoming action as we sawin 1933 on the annual chart. However, un-like 1933, which rallied back above the Up-trend Line, here we find that the markettested the major Uptrend Line early in Mayof 1931, but collapsed into the end of themonth. This was the opposite type of pat-tern needed to signal a low. June fell andtested the Downtrend Line and then ralliedback to the Uptrend Line but it failed toclose above it. July merely headed backdown again.

This was undoubtedly a confusing con-junction period. But the testing of the Up-trend Line with the subsequent failure toremain above it on a closing basis signaledfurther weakness in the market. Therefore,looking at the Monthly Chart # 3, you cansee that we would have continued to draw

new Downtrend Lines from the major highto each new high until we found the correctpattern which eventually unfolded at thebottom in 1932.

There is another method which I havetaught at numerous seminars on technicalanalysis. This is the development of a Re-action Channel. To illustrate this, let usnow look at the weekly chart covering theperiod of 1929 through 1932. The first chartillustrates the five Downtrend Lines whichwere constructed throughout the course ofthe collapse. We can see that the marketbroke through to the upside, creating fiveDowntrend Lines in the process. TheWeekly Chart # 2 illustrates a method oftechnical analysis which I developedthrough studying market activity.

Beginning with the first spike reaction inearly December 1929 (point A), and tyingthat to the first reaction low following the


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1930 high (point B), we have captured morethan merely highs and lows. We have cap-tured the thrusting reaction forces to formboth strength and weakness. I have namedthis line the "Break-Line" because it pro-vides a more definitive source of technicalsupport in comparison to the standard up-trend line normally taught in technicalanalysis. Here we have taken the reactionhigh before the major 1930 recovery peakand joined it with the reaction low thereaf-ter. Taking a parallel off the 1930 high pro-vides us with this reactionary force in achannel format.

You will immediately notice that through-out the course of the bear market, the oscil-lations of the market activity remained byand large within the confines of this chan-nel. This helps to quantify the market di-rection far better than employing thesimple Downtrend Line. Again, if we focusat the bottom of the chart where the marketfinally made its low, you will notice onceagain a testing pattern. The market on aweekly level tested the top of the channelearly that week and then rallied away fromit. Clearly we have a reversal in trend likeno other throughout the entire course of thebear market.

This channel provided guidance on allrallies insofar as defining the technicalpoints where the trend would have begun toreverse between 1930 and 1932. At nopoint did the market exceed the top of thechannel, fall back to test it, and rally awayfrom it until the major low had come intoplay during 1932.

Technical analysis was thought to be a lotof mumbo-jumbo. Even today, many fun-damentalists assert that technical analysis isof no use. Those who purport such state-ments are normally unfamiliar with thisform of analysis and lack the understanding

of market patterns and movements to pro-vide any form of a fair assessment. Al-though fundamental analysis is by far themost widely employed, the thinking processof man evolves and changes to such an ex-tent that what used to be bullish often be-comes bearish. There are no definitiverules which one can go by to say that ifinterest rates reach a certain level then themarket will peak or bottom, whichever isthe case. There is no such concrete rulebook because the market reacts to a broadset of fundamentals on an international aswell as a domestic level. Only a full andcomplete understanding of the interna-tional forces at work will provide a clearunderstanding and successful implementa-tion of fundamental analysis. Most funda-mentalists have failed over the long haul toremain consistent because they have notgrasped the entire scope of the thousandsof variables involved internationally tocome up with the true underlying forcesthat are at work.


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Chapter XVI

Fundamental ReviewT

here have been many who have writtenof the causes and effects of the Great

Bull Market and its famous demise. Manymarket analysts and economists havelooked back at this turmoil taking only whatthey desired in an effort to support a currenttheory that was most likely preconceivedfrom the outset. In the final conclusion ofthis work, I too will make an attempt to tieeverything together in a neat and orderlytheoretical package. But for now, it is muchmore important to gather all the facts andto make certain that they are absolutelycorrect and within the proper perspectiveso that our conclusions will not be basedupon an unwarranted preconception.

When I began this project, I too had manypreconceived ideas and notions, but in try-ing to draw some logical sense from currentmarket trends in the 1970s and 1980s, Ifound stark contradictions to what we haveall come to simply accept as standard eco-nomic theory. When you line up all thevarious writings about the Great Depres-sion and the opinions as to its causes andeffects, one is left with perhaps more ques-tions than answers. Most economists andanalysts have tried to view the causes of theGreat Depression solely in a domestic light.A few have broadened their mind’s eye byglancing at the corresponding events inother nations. But for the most part, thepolitical propaganda of the 1932 Presiden-tial elections has lived on in the minds of themajority who cite the tariffs, while othersseek to draw conclusions to support a so-cialistic model by pointing the finger at dis-

proportions of wealth among the variousclasses.

There is little doubt that the events of theGreat Depression had a profound impactupon the world both socially as well asgeopolitically. The seeds of the tragicworld war that followed were unquestion-ably sown through the hardships of theGreat Depression. The drastic escalatingincome tax structure within the UnitedStates was born from the notion that it wasthe rich who were responsible for the De-pression through the collapse in the stockmarket at the hands of speculation. Thesocialist ic forms of governme nt thatemerged in Britain and throughout West-ern Europe are also the children of inter-pretations of this tragic era.

Yet most of the conclusions and theoriesthat have surfaced in the post- Depressionyears are based upon observations that per-haps skimmed the surface of the issues ofthe time. Politicians and economists alikedrew conclusions and answers only fromwhat they wanted to see. Those who wereconvinced that the entire affair was forgedinto history at the hands of wild and uncon-trolled speculation clung to those ideas de-spite the fact that the Senate investigationsfailed to turn up any evidence to support thenotion that huge groups of bear-raiderspurportedly destroyed the stock market forpure profit. The issue of governmentalbond defaults hardly gained any press, forthis issue would have tainted the politicalstructure, shifting in part some of the blame


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from the private sector to wild and uncon-troll ed government spending.

Trying to fundamentally assess the GreatDepression and its causes is by far no easytask. No matter what I could ever write,there will always be someone who will dis-agree. Fundamental analysis lacks defini-tion in itself. For example, picture a manwho is standing on a ladder painting the sideof a building in downtown New York. Sud-denly a cat runs by a li ttle old lady who iswalking her dog. The dog becomes excited,breaks away from the little old lady and runsafter the cat, dragging the leash just behindhim. The cat runs under the ladder and thedog is in hot pursuit. The leash gets caughtaround one of the legs of the ladder and thejerking motion that results from the dog’srunning speed pulls the ladder right outfrom underneath the man. The man fallsand along with him the can of paint. Thepaint lands upon the head of a grumpy sortof chap who now becomes enraged at thepainter. He proceeds to pick the painter upby his neck and blames him for dropping thepaint on his head.

The painter in turn blames the man forwalking too close to his ladder, while a wit-ness to the whole scene breaks in to pointout that it was the dog’s fault. The li ttle oldlady finally catches up to the scene and theneveryone blames her for letting go of thedog. She gets upset and blames the li ttleboy down the street who let his cat out. Thelit tle boy blames his friend for holding thedoor open at his house, allowing the cat toget out in the first place. Since the boy isjust a boy, everyone wil l pin the blame uponhis father who just happens to be thepainter.

Well you could go on and on and blamethe person who gave the little boy the cat oryou could chalk the entire affair up to just a

freak accident. Such is the case of funda-mental analysis. Often there are so manycomplex relationships existing simultane-ously that any attempt to sort them out andplace them in the proper order becomesimpossible. This is now the task which I willattempt to complete in a rational and logi-cal sequence. Anyone who attempts to ar-gue must realize that placing the blame forthe Great Depression on any one source isdoing society a grave injustice. Extractingonly what we want to hear to support atheory for socialism or to usurp some newpower in the hands of government will nothelp us to avoid similar circumstances ofthis nature in the future. If we allow suchpersonal biases to color our words, therecan be no hope of social or economic pro-gress. The time has come when honestymust prevail over personal desires. If we donot make an honest assessment of society’spast mistakes, we will be doomed to repeatthem. That is a terrible legacy to leave ourchildren. Perhaps at the very least, progressshould allow each generation to make itsown NEW mistakes rather than to repeatthe old because they were ignorant of les-sons which history has tried to convey. If wefully understand our mistakes even withinour own personal li ves, then we have some-thing upon which we can build to create anew future, which hopefully will not be arerun of the past.

GALBRAITH

One of the famous books on this periodwas written by John Kenneth Galbraith andentitl ed the Great Crash. Galbraith basi-cally concluded that the Depression wassomething which could be explained in partby five causes. According to Galbraith,these five causes of the crash were:


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1) BAD DISTRIBUTION OF INCOME:

The well-do, Galbraith claimed, made uponly 5% of the population yet they ac-counted for one-third of the wealth. Thusthis disproportionate measure of wealthcould not be counted upon for great expen-ditures within the economy other than inluxury or investment areas. Thus, heclaimed that this type of spending was sub-ject to greater fluctuation than spendingupon necessities from the wage earner. Heconcluded that this type of high-bracketspending and investment was especiallysusceptible to the sudden drop in the stockmarket.

2) BAD CORPORATE STRUCTURE:

Galbraith asserted that the period wasmarked by excessive "promoters, grafters,swindlers, impostors and frauds" which cre-ated a sort of flood-tide of corporate lar-ceny. In addition, another weakness in thecorporate structure was the advent of theholding companies and investment trusts.Galbraith concluded that these holdingcompanies and investment trusts controlled too great a portion of stocks which weredependent upon regular dividends. If thedividends stopped, this would influence in-vestment trusts to liquidate the shares inthat company. Thus, corporate loans di-verted capital into dividends instead of ex-panding their business and new plants.This, he concluded, added to the deflation-ary fears and pressures. Income was thenearmarked for repayment of debt instead ofnew business expansion.

3) BAD BANKING STRUCTURE:

Galbraith wrote that the bankers were notexceptionally foolish in their lending. Butas the value of their collateral declined,many loans were needlessly called through

no fault of the borrowers who became vic-tims of the times. As market value forgoods and services as well as real estate,bonds and stocks declined, good loans un-der normal conditions were made to appearas foolish ventures on the part of banks.This is the net effect during any seriousrecession as Galbraith pointed out. Lend-ing $60 against IBM today may be prudentfor the moment, but if IBM falls to $12, or10 cents on the dollar, everyone chastisesthe banker for being foolish since he shouldhave foreseen such an event.

But Galbraith went on to point out thatthe inherently weak structure of the bank-ing industry itself was something separateand apart from good loans turning bad.This weakness in the banking system laysolely within the large number of inde-pendent banks. As one bank fell, this oftensent vibrations of fear into the public whowould then turn on their bank, often forcingits closure as well through needless panicwithdrawals. Thus one failure led to otherfailures, and these spread with a dominoeffect. Galbraith concluded that this dom-ino effect of banking failures influenceddepositors not merely to withdraw funds,destroying weak banks, and weakeningeven strong banks, but this effect also had arepressive influence on the spending of thevarious classes as well as investment.Therefore, the hoarding of funds furthercontracted the money supply and greatlyreduced investment.

4) THE DUBIOUS STATE OF THE FOR-EIGN BALANCE:

Galbraith pointed out that the UnitedStates had become a creditor nation. Thismeant that the loans that it had extended toforeign nations both during the war and inthe immediate post-war years had to berepaid through expanding trade with the


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United States. Failing to achieve a tradesurplus, payments for the difference weremade to the U.S. in the form of gold. Butthis could only be maintained on a tempo-rary basis. Galbraith concluded that whenHoover increased the tariffs, thereby cut-ting off the possibility of the Europeansgaining a trade surplus against the UnitedStates, he also cut the only means of settlingtheir debts, which forced their debts intodefault. Thus he concluded that the tariffshampered the U.S. economy. The reduc-tion was not vast in relation to total outputof the American economy, but it contrib-uted to the general distress and was espe-cially hard on farmers, Galbraith added.

5) THE POOR STATE OF ECONOMICINTELLIGENCE:

Here Galbraith stated that the economistsand those who offered economic counsel inthe late twenties and early thirties werealmost uniquely perverse. He suggestedthat the tax breaks instituted by Hoover inlate 1929 were negligible because they gavea greater break to the upper income brack-ets. In my opinion there is a little contra-diction here. Galbraith, in part, blamedone of the causes on the concentration ofwealth within the upper 5% of the popula-tion, stating that the stock market crash hurtthis segment especially helping to curtailinvestment. To now say that the tax breaksfavoured the higher brackets because theywere an equal cut across the board contra-dicts the first observation. If the upperclasses lost the most through the crash inproportion to their total net assets, where isan across-the-board tax cut unfair? Thisseems to be an argument trying to attack theupper classes for a high degree of concen-tration of wealth.

Galbraith then jumps to the 1932 erapointing out that both parties were calling

for a balanced budget. He said: "A commit-ment to a balanced budget is always com-prehensive. It then meant there could beno increase in government outlays to ex-pand purchasing power and relieve distress.It meant there could be no further tax re-duction.

Here Galbraith hints that perhaps thedistress could have been reduced had gov-ernment lowered taxes and shifted intodeficit spending. Galbraith does point outthat the budget went into a deficit underHoover, but this he concludes was notenough. Perhaps this is true, but the issueof public confidence seems to have playeda more definitive role in this debacle ratherthan a passive role as we will soon explore.

Professor Irving Fisher took another ap-proach. In referring to the stock marketcrash he wrote:

"That the stock market crash was primar-ily precipitated by foreign liquidation is theview expressed by John S. Sinclair in theNew York Times of October 27th. This liq-uidation accompanied the so-called HatryPanic on the London Stock Exchange whichresulted in a deeper fall of the Londonstock price level - 45.4 per cent from August30th to December 27th (1929), according tothe British Index - than occurred on theNew York Stock Exchange between thehigh point on September 7th and the bot-tom of November 13th. Few realize todaythat the greatest fall of stocks in Britishhistory comparable only with the BaringPanic of 1890, preceded and was an actuat-ing cause of the American panic, and that acoincident fall in Paris and Berlin accompa-nied the British liquidation. It began withthe failure of the banking house of ClarenceHatry in August, followed by his arrest inSeptember and subsequent conviction for agigantic forgery of stock certificates. This


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started the British liquidation in Londonand in New York. Barron’s Weekly of De-cember 9th (1929) notes that Britons wereextremely active in distributing stocks at thehigh level in New York during Septemberas seen by the movement in sterling ex-change..."

Indeed, in both cases, Galbraith andFisher touched upon certain issues whichno doubt contributed to the greatest panicin history. But neither offers a conclusivestatement to sum up the events of the era.Both admit that some influence from for-eign sources played a role in the events ofthe times but dealing with the situation bypurely increasing U.S. government spend-ing was not the answer either. The problemfacing any author on this period is still thefamous question: who was responsible forknocking the painter off the ladder?

A historian on any subject can go over thefacts of a period and draw a different con-clusion from another. I personally disagree

with those who have focused upon the highconcentration of wealth within the upper5% of the population as being a leadingcause of the Great Depression. This con-centration of wealth during this periodserved as the excuse for using the escalatingtax brackets which at one time were as highas 90% in the United States. This is PURESOCIALISM disguised in the cloak of de-mocracy. There is simply no excuse forsuch laws in a land where the slogan of itsSupreme Court is: "Equal Justice For All."If the super rich become richer, they are thevery people who funded and built GeneralMotors, Ford and Alcoa Aluminum. Withwealth greatly dispersed, capital must bepooled together among so many to formsuch new ventures. Far too often thosetypes of situations are impossible. The richwho do not invest in new companies, whichin turn create jobs for the middle class,perhaps leave their funds in a bank on de-posit, which in turn provides loans for mort-gages so that the average person can buy ahome. But above all, destroying the upper


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class destroys the American dream. It isthat hope of becoming successful that hasmade the concept of the United Statesgreat. It is the inspiration of the young toachieve their degrees. To attack the successof the upper class out of petty jealousy ismerely an attack upon the very concept ofthe free system. Those who often attack theupper classes are those who lack the drive,brains, and ambition to achieve those goalsand in turn they lash out from a jealousbitter attitude as did Karl Marx.

The populace can be so easily swayed intothinking that success is fine but super suc-cess is something that is a sin and should beoutlawed. Man has to face the facts. He isa horrible creature who derives pleasurefrom attacking his own kind be it throughphysical action or through the rumor millsthat attempt to assassinate another’s char-acter because of his success or notoriety.Man’s actions are often similar to a pack ofdogs fighting over a single bone. Just a fewof the men we have discussed thus far -

Willy Durant (founder of General Motors),Ogden Armour (Armour Meats), WilliamFox (Fox Films) - have each helped in theirown way to create a part of that Americandream and many jobs to this day owe a debtof thanks to these men for their visions. Itis exactly as Adam Smith described in his"Wealth of Nations" back in 1776. Societyis guided by an "Invisible Hand." Each per-son does not necessarily act with the inten-tion of building a society. But while in hisown pursuit of financial success, he in turnfurthers the advancement of society as awhole. Each of these men indeed furtheredthe American dream for us all. Yet eachdied a poor and beaten man at the hand ofbitter and jealous enemies.

Among the advertising that has illustratedthis first section leading into the Crash, youwill find several examples that refer to themanner in which the bond market was por-trayed. Bonds were the "safe" investmentwhile stocks were the "speculative" venturesfor high rollers.


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One main factor that must be placed inperspective is the scope of the bond marketin comparison to that of the stock market.We have undoubtedly heard much aboutthis stock market’s demise and little of thecollapse in the bond market. To this day, ifyou ask a municipal bond dealer if any U.S.municipal bond has ever defaulted, his an-swer will be NO with the possible exceptionof some obscure fire company in the Bronx.History has chosen to bring us facts aboutthe stock market’s demise but not aboutthat of the bond market.

The Senate hearings revealed years laterthat the total number of accounts within thenat ion’s twenty-nine various exchangescame to 1,548,707 customers out of a popu-lation of 120 million. Of this, only some600,000 accounts traded on margin. Thebalance were cash accounts. And amongthe 600,000 margin accounts, there was du-plication because obviously there were highrollers who held an account at more thanone broker.

Now let us take a look at the chart pro-vided here which illustrates the NUMBERof stock versus bond issues listed on theNew York Stock Exchange. Take note thatbonds greatly outnumbered stocks. Farmore capital was lost in the bond marketsduring the Great Depression than in thestock market. This chart illustrates that thenumber of listed bonds since 1865 had al-ways been greater than the listings of stocks.Although the greatest gap between thenumber of bonds listed versus stocks cameduring the late 1890s, overall it has essen-tially remained close to that level of betterthan a 2 to 1 ratio until 1921. By 1929, thegrowth in the number of stock issues hadstill not surpassed that of the bond marketnumerically as the Great Bull Market cameto a peak. This chart definitely illustrates

that during the 1920s, stock offerings grewmore favorable than new bond offerings inthe eyes of the public at large.

In our second illustration, "U.S. StockPrices As Percentage of Bond Prices 1900-1930," we can see clearly that a flight frombonds into common stock picked up greatmomentum beginning directly in 1927 dur-ing the period of the Central Bank interven-tion. Stocks reached a multiple of 168%above bond prices. Note that stock pricesalso peaked during 1902 just prior to thepanic of 1903, and again in 1906 just priorto the panic of 1907. The peaks in 1909 and1915 also corresponded to peaks in the DowJones Industrials as well. Therefore, ineach crest on this chart we find waves ofspeculation where capital began to shiftfrom bonds into stocks. But still the wavebetween 1927 and 1929 was greater than atany point in previous history. Concern overthe vast amount of bond offerings on thepart of shaky foreign governments at ratesof three to five times that of U.S. domestictime deposits somehow began to lose theirattractiveness when security was to be ques-tioned.

We read how the Fed and governmento fficia ls be came conce rned over t heamount of money in the brokers loans. Yethere we can see that the ratio of brokersloans to total market value never evenreached 10%. At the peak in brokers loans,a total of nearly $6.5 billion was involved.We read that the amount of kited short-term German bills and notes in 1931amounted to $10 billion. By the time youadd up all the vast amounts of foreign debtand losses incurred through U.S. municipalbonds as well as real estate loans, whichbecame frozen assets or outright defaults,the figures came close to $100 billion. Thisamount vastly overshadowed the amount ofmoney on loan in the U.S. stock market.


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Indeed, the $10 billion kite of German debthad made the brokers loans out to be aminor problem considering the low ratio tototal market value.

The next two charts that have been pro-vided to illustrate that at the market’s peakin 1929, the total value of all stocks listed onthe New York Stock Exchange amounted tonearly $90 billion. The total bonds listed atpar value on the New York Stock Exchangecame close to reaching $49 billion in 1928.When the stock market began to decline in1929, capital immediately began to flowinto the bond market taking with it a rise inthe total par value up to slightly above $49billion. The abrupt up move in total parvalue in 1928 is attributed to the listing ofthe British War Debt issue which was laterwithdrawn after 1932.

Keep in mind that 99% of the total stockvalues were U.S. issues, NOT foreign whichhad been precluded from listing during thepre-1928 years. No flood of European

stock issues came rushing into the NYSEwhen the ban against foreign issues waseventually lifted. Remember that foreignstock had to show a track record of consis-tent dividends in order to gain a listing.This prompted a greater tendency for for-eign issues of bonds to be listed where thequalifications were odd enough, less strin-gent. The vast majority of bonds were notlisted on the NYSE. They traded within thecash markets. Peru, Chile, Germany, etc.,were among these off exchange issues.Therefore, in a very real sense they were outof the major lime-light of the Indexes,which meant that history too has tended toforget their impact on the causes and effectsof the circumstances. The stock market,however, was right up front and it managedto capture center stage.

The yield on corporate U.S. bonds rosesharply from just below 5% in early 1929 tonearly 9.75% in 1932. You can imaginewhat happened to the yield on many foreignissues which had previously been 7% prior


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to 1929 and exceeded 25% by 1931. Theflood of weak bond issues and the defaulton municipals, such as that of the City ofDetroit, did more damage to the aftermathresulting in the Great Depression than anyother single factor. Capital was literallyscared to death of bonds as well as stocks.As a result, corporate bonds of even thehighest quality were somewhat tainted.Common stock in the very same companieswas often viewed as still better buy thanbonds. Capital did swing, however, intoU.S. government bonds. Here I have pro-vided several yearly charts of the U.S. Lib-erty Bonds of various yield and issue. In allcases, we can see that an important low hadbeen made in 1929 as the Fed hiked thediscount rate up. Note, however, that theinitial reaction of the U.S. Treasury Bondswas one of a positive nature, r ising intoearly 1931. But during the Monetary Crisisof 1931, when rumor spoke of the U.S.abandoning gold, the Liberty Bonds col-lapsed. Confidence internationally hadreached a low and the treasury bonds by and

large bottomed during early 1932 alongwith the dollar. Their gains made into early1933 were again shattered under the pros-pe ct s o f t he in flat ionary po l icies ofRoosevelt.

The next illustration of the yield on high-grade railroad bonds from 1857 to 1930illustrates the general overall trend of cor-porate bond yields for an 87- year period inthe United States. The 1920 high on therailroad bond yields was not as high as thaton the overall corporate bond yields if youcompare this chart to that of the Dow JonesBond Index. The Dow Bonds registerednearly a 7% peak in 1920, whereas the railsreached only 5.5%. The railroads had beenthe leading companies during the Bull Mar-kets up to 1907. The public viewed the railsas less speculative as if one might considerthem to be a utility in today’s terms. Tosome degree, the rail bonds were among thebest performing corporate issues during thedebacle.


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The United States was undoubtedly agreater lender of money during this period.Capital flowed back and forth internation-ally on the whims of confidence as we havenoted for various reasons, including warand foreign exchange fears of devaluation.The greatest of all factors which led to theGreat Depression was the collapse in thiscredit structure resulting in the contractionin money supply which many have blamedon the Federal Reserve’s fears of reflating.Although Galbraith criticized the eco-nomic thinking of the period as perversebecause of the calls for a balanced budgetin 1932, I find myself in disagreement. Theeconomic logic of calling for a balancedbudget emerged after the monetary crisis of1931. Hoover indeed took the road towarddeficit spending, trying to stimulate andprop up the economy as Galbraith claimedwas necessary and, indeed, as Keynes por-trayed as mandatory. The switch to bal-anced budget did not arrive until 1932 whenrumor had attacked the dollar. Calling for abalanced budget was a step toward trying torestore confidence to the internationaleconomy in so far as the U.S. would standby the gold standard, assuming the role ofthe lighthouse in a torrent of fiscal irrespon-sibility. The unbalanced budget did notsupport the U.S. markets and those whosimply argue that Hoover didn’t spendenough and that is why Hoover did not workmust convince me that huge governmentexpenditures can prevent a deflationarymode when such periods as that of 1981-1985 exist. Never before did the U.S. fiscalbudgets go so far out of balance year afteryear, yet inflation yielded to deflation inspite of such theory to the contrary. No,criticizing Hoover for not spending more asbeing a cause of the Depression is not logi-cal in the face of economic circumstancesof today. The call for a return to a balancedbudget did not come in 1930 nor in 1931,but only after the monetary system of the

world cracked wide open within its veryfoundations at the hand of fiscal irresponsi-bility stemming from abroad. Yet again, wefind the philosophies of the spend thriftextracting only what he wants to hear andclaiming that it could have been preventedby not less irresponsibility, but insteadgreater fiscal irresponsibility.

Another example of a period when gov-ernment spending continued to rise whilethe economy failed to be stimulated was therecession of 1937-1940. During thoseyears, further advances in governmentspending failed to prop up the economy inexactly the same circumstances that tookplace between 1930 and 1931.

The calls for a balanced budget were notperverse. The entire investment stimulusaround the world had been dealt a shockingblow by the numerous banking failuresalong with sovereign defaults on outstand-ing bond issues. Investment capital wasdriven into hibernation and its emergencein 1933 was not a testament to the policiesof Roosevelt, but to the fears of a dollardevaluation and a hedge against inflation.As long as capital viewed deflation beforeits eyes, hoarding of resources was thesmart thing to do. When inflation of majorproportions was suspected on the horizon,idle cash would then depreciate and thesmart thing to do was to invest in somethingelse which would appreciate with the newtrend. Thus Roosevelt’s policies were notbrilliant in the sense that they offered aformula for future generations to follow.But they were successful in scaring capitalout of hiding and under such circumstancesthey would work. But when capital is not inhibernation, such policies have failed.

Thus, the state of the international situ-ation dominated the time. The collapse inthe credit structure perhaps dealt the most


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U.S. LIBERTY BONDSYIELD 3.5%

1917 1921 1925 1929 1933

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U.S. LIBERTY BONDS (1ST ISSUE)YIELD 4.25%

1917 1921 1925 1929 1933

10500 10400 10300 10200 10100 10000 9900 9800 9700 9600 9500 9400 9300 9200 9100 9000 8900 8800 8700 8600 8500 8400

U.S. TREASURY BONDS YIELD 4.25%

1922 1925 1928 1931

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U.S. LIBERTY BONDS (4TH ISSUE)YIELD 4.25%

1917 1921 1925 1929 1933

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serious blow to all nations, particularly in1931.

Perhaps the simplest example of thiscredit structure can be viewed as a parallelto a popular child’s game of musical chairs.F ive children begin the game with fivechairs. When the music begins, they allstand up and begin to walk around thechairs but the adult watching over the grouptakes one chair away. When the musicstops, the five children fight for the fourremaining chairs. The process continuesuntil only two children and one chair re-main and when the music stops for the finaltime only one will win the game. He is thelucky soul holding the last chair.

Thus was the fate of the credit situationwhich dominated this era. Germany, forexample, was saddled with reparation pay-ments it could not make for France, andothers were reluctant to allow it free reignin selling its exports. Each nation contrib-uted by its various tariffs in a game of com-

petition to rebuild. Each also floated sub-stantial amounts of bonds, notes and billsseeking capital largely aimed at rearmingitself rather than in stimulating economicgrowth. Germany was forced to issue short-term notes which it used to make its repa-ration payments as well as to pay its intereston its long-term bond obligations. Thus thegame of musical chairs began, but in reallife it was a deadly game of musical kitingbonds.

Capital had become concentrated withinthe United States following World War Iand was largely in the form of gold. Thiscapital came from two basic sources. First,it came through American supplies sold toEurope during the war, which resulted indirect profits for American industry andagriculture. Second, capital arrived in theU.S. on the heels of fear which spreadaround Europe as war cast doubt on notonly who would survive as the victor but onthe victor’s ability to meet its incurred debtas a result of fighting the war.


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The vast concentration of wealth pro-duced the inflationary period which cameto its crest in 1919. With European capacityto manufacture and even cultivate food foritself destroyed in the ensuing Europeanbattle, commodity prices had to rise. Thisspawned criticisms that American businesshad been extravagant in 1921 which led tothe deflationary years of 1920 and 1921.

American business had become addictedto the high demand for its products andexpanded as if it would retain that high levelof demand in the post-World War I era.That was a bad business judgment whichcost the financial fortunes of many, includ-ing Ogden Armour.

If we look at the chart of Wholesale Com-modity Prices in the United States from1800 to 1934, commodities reacted in a nor-mal manner as they had previously duringthe War of 1812 and the U.S. Civil War.Whenever productivity is disrupted by war,prices of raw commodities rise rapidly.

But unlike the events which followed theWar of 1812 and the U.S. Civil War whichnecessitated the rebuilding of the UnitedStates’ industry itself, the aftermath ofWorld War I left U.S. industry all dressed upwith nowhere to go and in a vulnerableover-expanded state. However, industrybecame fat and loaded with cash following1920, which is why it was capable of gearingup quite rapidly to supply the rebirth ofEurope in the post-1921 years and the re-surgence of economic expansion throughthe guides of new and exciting develop-ments in technology.

That rebirth of Europe came on the no-tion that lending to foreign sources wouldin turn result in their buying of U.S. goods.This was the concept and the dream at first,

but toward the end of the 1920s, a trade warbegan and the U.S. saddled its own industrythrough numerous anti-trust proceedings.This had a dampening effect upon U.S.competitiveness during the late 1920s,which finally gave way to imposing tariffs toprotect U.S. industry instead of lifting thevery restraints which had made it uncompe-titive in the first place - the Sherman Anti-Trust Act.

With wealth concentrated in the UnitedStates, Europe had to attain a trade surplusin order to repay its loans. Thus the essenceof a trade war began. American industryhad provided goods for which it was paidout of lending U.S. capital to its foreignconsumers. Therefore, this created a vastamount of foreign debt which floatedaround waiting to be repaid like a game ofmusical chairs. With American industrybeing prohibited by trade barriers set up bythe E uropeans and U .S. capital beingsucked up by foreign sources, the founda-tion of the American economy was under-mined.

We read that for each dollar in gold, $13in credit was created in the banking system.Money is merely a medium of exchange. Itcannot be eaten or used for anything unlessthe party on the other end recognizes it tobe worth something. Thus the strict percep-tion of money was not actually paper dollarsbut gold bullion when all things were soldand done. There are two forms of wealthwhich man accrues in life - cash and tangi-ble assets. Within these forms of tangibleassets, one finds stocks, bonds, real estate,fine art, precious stones, automobiles, etc.As credit is created, these forms of tangiblewealth increase greatly. Thus the rise in thestock market does not create more gold nordoes it create more paper dollars in physicalform. It creates paper profits as we call


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them which expand the available creditstructure.

Therefore, during great waves of prosper-ity and speculation, these forms of tangibleassets gain in value tremendously yet nomore physical gold or paper currency wascreated in the process. When the musicalfloating bonds came to a halt, suddenly hit-ting the world economy, a massive wave ofliquidation took place. People naturallybecome frightened and in the process try tosell off these tangible forms of wealth. Be-cause these forms of wealth vastly outnum-ber the actual real gold bullion or physicallyexisting dollars, the value of these tangibleassets drops dramatically on a reverse lev-erage basis. As the value of these tangibleassets declines, the value of collateral alsodeclines at the bank. Thus, the Great De-pression was a period during which a mas-sive contraction in the "tangible value" ofhard assets took place.

As this unfolds, the dollars created at thebank through multiple loans contract inproportion. There is only so much gold orphysical paper dollars to go around. In thiscase, new gold could not be created. Thusmany blame the Fed for contracting themoney supply because they nourished fearsof rekindling inflation. Although they didhave such fears which were unjustified, theydid not understand the magnitude of thereverse leverage which was taking placewithin the economy. We will see when wereview the Monetary Crisis of 1971 that theonly vital difference between 1971 and 1931was in what the public physically consideredto be money itself. The 1971 monetary cri-sis internationally came when the U.S. goldreserves could not meet its internationaldebts exactly the same as we have seen inthe case of Germany, Britain, and manyother nations during the 1931 period. Theonly difference was that there was not ashortage of paper dollars in 1931, but ashortage of gold. As long as Americanswere prohibited from owning gold and after


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two generations being ignorant as to goldactually being money, no domestic panictook place within the United States during1971. No hoarding of paper dollars tookplace in 1971 so the banking deposits didnot contract to spark massive banking fail-ures as occurred in 1931 to 1933. The con-fidence of the populat ion was not lostbecause they knew not of gold, nor of itsrole in the international monetary system.But in 1931, gold was money and with eve-ryone demanding only gold around theworld, the contraction in credit was inevita-ble, unlike the monetary crisis of 1971.

During the Great Depression, hoarding ofgold by American citizens further con-tracted the credit reserves of the banks,forcing more failures and a further deterio-ration in the value of tangible assets includ-ing bonds, stocks, and real estate.

There is little question as to the major roleforeign debt played during this period.Shifting international capital from one na-tion to another sparked currency controlswhich brought the international trade al-most to a screeching halt, inflicting for moredamage than tariffs alone. Thus it was thechanging tides of international confidencewhich both gave America vast amounts ofexcess wealth during the 1920s that in turnhad taken it away through the monetarycontraction and international defaults. TheGreat Depression was no more created bythe rise and fall in stock prices nor by thefrauds perpetrated by stock brokers andbankers in the 1920s than the lack of effectwhich the rising U.S. trade deficits and fed-eral budget deficits had on the massive rallyin the dollar between 1980 and 1985.

The massive hoards of capital and debtwhich revolved around the world simplycame to a halt and in the process the slight-est increase in demand for cash, in this case

gold, resulted in a reverse leverage effectupon the money supply within the world.The Fed would have had to have created inphysical form enough paper dollars equal tothe amount of "paper profits" placed as col-lateral for loans at the banks in order tooffset the contraction within the moneysupply. This was a position both highly in-flationary in perspective yet in reality non-inflationary. The inflation within the valueof these tangible assets had already beencreated through the banking system bymeans of credit. The Fed did not under-stand the magnitude of this reverse lever-age effect and therefore the increasedgovernment spending implemented byHoover was vastly overshadowed by thewiping out of $10 billion on the part ofGermany alone.

The effects of the Great Depression arenot unique to this period. It was not a freakin man’s history, merely a repeat of similarcircumstances in a more advanced interna-tional economy. These same forces are atwork at all times and the threat of settingthem off again will never disappear. Gov-ernment’s concept that by borrowing fromthe public rather than monetizing its defi-cits neither creates less inflation nor does itsolve the problems. It merely postponesthe issues at hand as did Germany throughits massive rolling over of debt throughoutthe 1920s and early 1930s. Eventually theproblem must come to a head and this iswhat politics seem to fail to understand.

Enacting laws and sanctioning witch huntsto chastise traders who shorted stocks weremerely futile exercises in trying to shift theblame from official defaults on bonds intothe laps of the speculative stock traders. Nomassive bear pools were ever uncoveredand most who were prosecuted had losttheir fortunes in the decline of the marketitself.


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Those who look back at the 1920s, claim-ing that it was a period of no inflation andtherefore drawing the conclusion thatstocks rise during periods of noninflation,have missed the entire lessons this periodhad to offer. It was a period of great tran-sition from a heavily commodity orientedeconomy into a new age of mass-produc-tion. Inflation is not purely a rise in com-modity prices but it is a rise in the generallevel of all tangible assets including stocksand real estate. The very presence of theFlorida land boom in the mid-20s is reflec-tive of the rise in the value of real estatethroughout the United States to varying de-grees. The rise in the value of stock was inreality inflating the assets of American in-dustry. Raw commodities declined be-cause of a wave of great overproductionwhich followed 1919 and kept prices incheck for twelve long years.

The United States vastly improved itscapacity to produce but the growth rate ofthe world to consume did not keep pace.Once the saturation level was reached, adecline was inevitable. Looking for causeswithin the domestic situation will no morelead to the answers of the Great Depressionthan trying to blame the inflation of the1970s on the backs of the Hunt brothers forbidding up the price of silver into 1980.

In the post-World War II years that fol-lowed, the free markets have been greatlyinfluenced by the shifting tides of interna-tional capital flows. The quest of nationsfor a trade surplus continued and the tradebatt le s and compe tit ive de valuat ionsmerely became a tool in the postwar era togain trade advantages. The lessons of theGreat Depression were not learned andinstead governments would seek to controlmany more aspects of their economies, re-sulting in greater levels of taxation and pub-

lic debt. The war over trade and the ex-change controls on capital nearly broughtthe international economy to a final end in1931-1932. But those tactics would not berelinquished in the decades that followed.


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Chapter XVII

Thus far we have reviewed this tragic pe-riod in economic history from the per-

spective of the fundamentalist, thetechnician and now we will look at it fromthe economic side of the street. Each viewhas its own distinct merits and by and largeperhaps the answers lie within the combi-nation of all three. The political explana-tions are not worthy of exploring since aDemocrat or a Republican would just assoon tear the nation apart with outright liesabout each other to gain the power of theiradversaries. Therefore, whatever theDemocrats had to say about the blame forthe world depression resting upon theshoulders of Hoover was not void of per-sonal motive and certainly had little resem-blance to the true facts.

But up to now, both the technical perspec-tive and that of the fundamentalist has beenlargely biased toward the domestic aspectsof the events. Regardless of what politicalfactions would have us believe, we mustbroaden our mind’s eye to view the worldfrom a more global perspective. This is notthe norm in analytical thinking but I believeit will help to settle many issues which oth-erwise go unanswered.

Economics itself is a social study which isprone to great biases according to philo-sophical ideas. Economics has often beenthe manipulative tool of politics as it tendsto twist events and logic to suit a particularidealized goal. Politics and economics aretwo words which have been married fromnearly the dawn of civilization, yet at thesame time they are so incompatible thatthey should have been divorced right after

their first date. Nonetheless, this conflict-ing political-economic interrelationship issomething which we must understand andcome to terms with. It is this very biasedconflict in politics which draws conclusionsfrom economics to support an idealized po-litical goal. In reality, the Berlin Wall waserected with political bricks held togetherby Marxian-Philosophical mortar. Theconflicting economic systems of capitalism,socialism and communism are all the chil-dren of economic supposition.

Politics has been a parasite living off eco-nomics and exhorting what often appears tobe logical conclusions. But logic itself canbe a deceiving thing. For example, if youasked a man who was 105 years old how longhe expected to live, he could reply that it isknown fact that very few people die beyondthe ripe old age of 100. Granted this statis-tic is true and to some degree you couldclaim that the odds of dying before the ageof 100 are greater than after 100. But thisis where logic is confronted with reality.U nfortunately or fortunately, whatevermay be the case, man is not immortal, onlyimmoral. The same trick one may play withthese statistics has been the name of thegame when political economics comes intoplay.

One might argue that the economic con-traction during the Depression was causedby the reluctance on the part of capital toinvest. Therefore, the recovery was ham-pered by the rich who hoarded their wealth.However, the "but" in this case was the pros-perity which preceded the Great Depres-sion. Had capital not been free to strugglefor new means of profit, then the innova-tions such as the automobile would never


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have been made affordable for the averagecitizen. Logical one-sided arguments areeasy to draw from any such situation. Butthe standard of living under communismand even under socialism is far lower thanunder a free capitalistic system. Those whoclaim that this is propaganda devised bycapitalists should take a tr ip to Berlin andwalk through "Check-Point-Charlie." Sto-ries of food lines and seven year waiting listsfor cars or reports of having to obtain gov-ernmental permission before moving arereal, not fiction. I had to see it for myself aswell in order to believe what often ap-peared to be exaggeration. As with any-thing, the reality of events must eventuallycome face to face with theory. And this isalso true of socialism, communism or capi-talism.

There have been many famous econo-mists who have added their two-cents to thekitty since the first book on the subject waswritten by a Greek chap named Xenophonway back in the middle of the fourth centuryB.C.

The word economics is Greek in origin,compounded from "oikos" (household) andthe complex root, "nem-" (to regulate, ad-minister, organize). Xenophon’s book,"Oikonomikos," was the guide for the gen-tleman landowner beginning with a chapteron the proper use of wealth. Xenophonthen leads into a chapter on the virtues andleadership qualities which a landownermust maintain. Some of the other chaptersgo into the proper training and manage-ment of one’s slaves and it even dives head-first into a modern controversial topic, theproper training of a wife. In many respects,Xenophon’s book combines the propermanagement of one’s wealth with the moralethics suited for one’s status, somethingthat modern man has forgotten in his questfor wealth.

Xenophon’s book was largely copied or atleast served as the model for a 1742 publi-cation titled: "Short Introduction to MoralPhilosophy" written by Francis Hutcheson,Professor of Philosophy at the University ofGlasgow. It was Hutcheson who was theteacher of Adam Smith. It is with Smiththat most consider the field of modern eco-nomics to have its origin. But in reality,Hutcheson’s book follows that of Xeno-phon nearly chapter by chapter.

Ever since the days of Xenophon, eco-nomics has been sorting out who struckJohn in what has seemed to be an endlessbattle suitable for a Greek tragedy itself.The arguments over such things as even thevalidity of interest rates stems back as far asAristotle who in 322 B.C. consideredmoney as purely a medium of exchangewhile interest was simply unacceptable. Inthe middle of the 13th century, SaintThomas Aquinas dealt with the field of eco-nomics in his monumental 20 volume work,"Summa Theologica," in which he believedthat interest should only be taken if it wasearned, while unearned interest was tanta-mount to the sin of usury which meant thatit was wrong to extract interest from some-one who was in desperate financial condi-t ion. But more important ly, Thomastackled an issue which to this very dayhaunts modern economics.

Saint Thomas Aquinas discussed his con-cern with the concept of the justice in thedistribution of income. He stressed theneed for a just wage and just price. Al-though he saw in the economic system theinequities within the distribution of in-come, he concluded that despite such in-equities, it was immoral to attempt to alterthe distribution of income in any way. In-deed, many have argued this very point,including Marx, but from the other side of


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the coin. Yet to disrupt the inequities withinthe distribution of income, one must violatethe personal freedoms of another. There-fore, by trying to strike at what some maybelieve is an injustice, they themselves cre-ate another injustice - the violation of per-sonal rights and freedom. Saint ThomasAquinas was canonized in the year 1323.

In 1755, "Essai Sur la Nature du Com-merce en General" was published by R ich-ard Con t il lon , an Ir ish in ternat ionalbanker. Although Cantillon’s writings arelargely forgotten today, he was nonethelessone of the very first writers to challenge aconcept which had dominated the politicaleconomy of Europe up until this time. Thisconcept of how things should work wasknown as the mercantilist’s perception ofwhat actually formed a nation’s wealth. Itwas the merchants who argued, from theirown biased viewpoint, that a nation’swealth lay solely within the amount of goldor money it possessed. Therefore, it wasjustified to block imports and bar free trade,thus affording a domestic monopoly so thatthe nation might avoid a trade deficit whichresulted in a drain upon its national wealth- gold.

Cantillon’s argument was that money wasmerely a measure of wealth and that wealthitself was really derived from production. Itwas with Cantillon that we begin to see theconcept of something beyond purely gold orpaper money constituting a nation’s wealth.Even though Aristotle viewed money asmerely a medium of exchange, this simpleconcept had been lost for a great number ofyears. Indeed, chronic trade deficits haddrained the treasuries of many great em-pires between the days of Xenophon andthose of Cantillon. It was the great Virgilwho wrote in 19 B.C., "Accursed thirst forgold! what dost thou not compel mortals todo?"

Although the forums of many ancient so-cieties had long recognized the evils ofwealth, they had explored the issues of whatwas wealth in the glorious days of Athens.But those great thoughts seemed to laysomewhat silent. The stone freizes couldnot speak of the downfall of Mycenae, ofAthens nor of the once great city of Thebes.The 17th through 20th centuries would findeconomics still regurgitating the same age-old debates striving to define what actuallycomposed a nation’s wealth.

Francois Quesnay (1694-1774) was aFrench economist who was actually a phy-sician to Louis XV in 1752. But in 1758 hepublished his "Tableau Economique" whichmade him the father of what became knownas the "Physiocrats" of the day. Quesnay’swork divides society into three groups: ag-ricultural workers, proprietors, and the"st e ri le m anufact ur ing secto r ." ThePhysiocrats believed that NATURE wasthe source of all wealth and therefore agri-cultural workers provided society’s meansof receiving the surplus, or "produit net"given forth by nature herself.

Quesnay’s work set about attempting toshow how this "produit net" was distributedamong the various classes within societyand in reality this was one of the earliestattempts at looking at the inter-workings ofthe "domestic" economy as a whole. Ques-nay’s doctrine, therefore, concluded thatsociety should be governed by a naturalorder inherent in itself. Land and its un-m a nu fa ct u r e d p r od uct s , Q ue sn aypreached, were the only true wealth and theprecious metals were actually a false stand-ard of wealth. Thus he concluded that theproper source of state revenue should bethe direct taxation of land. But he alsomaintained the right to free trade, person,opinion and property. Thus it becomes un-


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derstandable why some of the first papermoney issues of France were not backed bygold, but by land.

Perhaps you can begin to see why arguingover what even constituted wealth couldalter the concept of how society should bemanaged. Concluding that a nat ion’swealth was purely the amount of gold it heldled to the protectionist philosophy of themerchants who thereby sought to blockcompetition to enhance their own domesticmonopolies, of course, in the good name ofthe country. Concluding that land was thetrue source of wealth gave rise to the excuseto tax the landowners and also tended tojustify war for the sake of acquiring land.

It was at this junction in history whenAdam Smith, the "father of modern eco-nomics," entered. The thoughts of thisScottish political economist and philoso-pher changed the course of thinking in adramatic way. In his classic work, "TheWealth of Nations," published in 1776,Smith advocated a simple system centeringaround political liberty. Within this boldidea, each man should be free to "pursue hisown interest and bring his capital and indus-try into competition with any other man orgroup of men." Smith essentially turned hisback upon the concept of mercantilismwhich dominated his day. Smith proposedthat the true wealth of a nation residedwithin its LABOUR and no t with t heamount of gold it held nor was wealthstrictly confined to agriculture. "Labour...isthe real measure of the exchangeable valueof all commodities." Smith recognized thatthe value of a commodity was not alwaysbased strictly upon supply and demand butalso it remained dependent upon theamount of labour it to ok to produce it."The whole produce of labour does not al-ways belong to the laborer. He must in

most cases share it with the owner of thestock which employs him."

Adam Smith did lay out a design in whichhe believed that a nation’s capital should bebrought to bear first upon developing agri-culture, secondly upon manufacture andonly thirdly upon foreign commerce. It wasSmith who influenced the enlightenmentera and truly dissected the economy fromtaxation right down to supply and demand.His greatest single contribution in my opin-ion is his concept of the invisible hand. Itwas here that Smith explained that by eachindividual pursuing his own desires to im-prove his personal financial condition, hecontributed to the advancement of societyas a whole in an orderly fashion incapableof duplication by any law or decree. Eachand every one of us in our quest to betterour own position helps to advance the econ-omy as a whole. Herein lie the seeds offreedom. It was the innovation of HenryFord who raised the standard of living forus all today. It was the gamble of Rockefel-ler that gave birth to the oil industry. It wasthe dream of Willy Durant that spawnedGeneral Motors and it was the faith of An-drew Mellon that created the aluminumindustry. Smith was right. Each in his ownpursuit may perhaps benefit disproportion-ately on an individual basis, but collectivelysociety benefits much more from the free-dom of the entrepreneur.

Too often most people are jealous of thewealth accumulated by such an individual.But Smith’s observations stand. These in-dividuals have given society thousands ofjobs and the income derived by the workingclass as a whole far exceeds the income ofthe individual. Yet it is the jealousy whichcauses men to compare things on an indi-vidual basis, but the labourer has merelycontributed his own production to societywhereas the entrepreneur has created


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thousands of jobs within society. The twocannot be compared on an individualwealth basis without taking into considera-tion the individual contribution of each to-ward the expansion and growth of society asa whole.

Although most modern economists creditthis theory of the "invisible hand" to AdamSmith, the same observation had beenmade nearly 2,000 years before. In 336B.C., Aristotle explained: "That which iscommon to the greatest number has theleast care bestowed upon it. Every onethinks chiefly of his own, hardly at all of thecommon interest; and only when he is him-self concerned as an individual." Epictetusin 138 A.D. also observed this self interestof the individual benefiting society as awhole. "In general Zeus has so created thenature of the rational animal, that he canattain nothing good for himself, unless hecontributes some service to the community.So it turns out that to do everything for hisown sake is not unsocial."

Adam Smith had in part been influencedby another distinguished Scottish philoso-pher, David Hume, who had published hiswork, "Political Discourses," in 1752. DavidHume’s best contribution was an essay en-titled "Of Money." In this bold essay, Humealso attacked the mercantilism of his dayand its fears concerning free trade. Humepointed out that money movements actu-ally responded to a rise or fall in prices,which prevent permanent surpluses or defi-cits. Hume actually anticipated the quan-tity theory of money and in plain language,the concept that a rise in the supply ofmoney is followed by a rise in prices orinflation. "It seems a maxim almost self-evident that the price of everything de-p e n ds o n t h e p r op or t io n be t we e ncommodities and money. In all due re-spect, if anyone should be given the credit

for supply and demand theory as well astheory of inflation, perhaps that distinctiontruly belongs to David Hume.

The thinking process in economics wasfurther shaped by David Ricardo who pub-lished many works but whose most impor-t an t was the "Pr inciples of Pol it icalEconomy and Taxation." Among R icardo’smost important theories was that of Com-parative Advantage. It was here that onecan see that nations would be better off ifthey specialized in producing goods wherethey held a comparative advantage insteadof blocking trade or subsidizing an uncom-petitive domestic industry which merelysupports artificially high prices within theirown nation. In essence, Ricardo touchedupon a very key issue which today is still farfrom being clearly understood. Many a na-tion raises trade barriers to protect an un-competitive domest ic industry. Quiteoften, this urge to protect an industry re-sults in a higher price paid by its own con-suming populace. Thus a nation wouldspend its resources in a better area if itpromoted an industry where it held a com-parative advantage.

It is most probable that it was actuallyR icardo’s thoughts upon labour whichhighly influenced Marx years later. It is notto be understood that the natural price oflabour, estimated even in food and necessi-ties, is absolutely fixed and constant. It var-ies at different times in the same country,and very materially differs in differentcountries. It essentially depends on thehabits and customs of the people. There islittle doubt that one might interpret at leastin part from Ricardo’s words that the valueof labour could be changed under this ex-planation or observation. It may have beenthis thought itself which sparked the mindof Karl Marx.


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In many ways, economics was still tryingto define exactly what was the wealth ofnat ion. Was it gold, land, agriculture,manufacture or labour? The distribution ofwealth within society also remained vio-lently controversial topic which was merelyexploited further by Karl Marx during themid-1800s.

As the father of communism, Marx was aGerman philosopher and economist whoobtained his doctorate in 1841 from theUniversity of Jena. Karl Marx lived a verynomad ic l ife style wande ring aroundEurope and finally settling down in Londonin 1849. H is Communist Manifesto waswritten in 1848 with his friend FrederickEngels. Marx’s famous "Das Kapital" waspublished finally in 1867. Much of his laterpamphlets and two additional volumeswere published between 1885 and 1899posthumously by Engels. It was throughthis extensive work that Marx attackedcapitalism for the exploitation of the work-ing class. In essence, his view was that thevalue of labour was the wealth of a nationto a large extent and it was the suppressionand exploitation of the working class whichled to revolution and the ultimate socialisticstate.

Marx viewed the world through a classstruggle between the rich and the poor."You are horrified at our intending to doaway with private property. But in yourexisting society private property is alreadydone away with for nine-tenths of the popu-lation; its existence for the few is solely dueto its non-existence in the hands of thosenine-tenths!" Marx himself said that youcould sum up his theory of Communism inone sentence: "Abolish all private prop-erty."

In part it was the British system of longleasing property for 100 years in which the

ownership merely remained within thehands of a noble family for generations.Thus the pearly white townhouses of Victo-ria and Kensington never changed hands,merely tenants. Thus property was with-held from the working class who had noth-ing to leave their heirs whereas the tangiblewealth of the noble families passed downfrom generation to generation.

In part it was also Marx’s logical pursuitof value and price which persuaded himtoward his communistic theory. "We arrive,therefore, at this conclusion. A commodityhas a value, because it is a crystallization ofsocial labour. The greatness of its value, orits relative value, depends upon the greateror less amount of that social substance con-tained in it; that is to say, on the relativemass of labour necessary for its production.The relative values of commodities are,therefore, determined by the respectivequantities or amounts of labour, worked up,realized, fixed in them." (Value, Price andProfit published 1899)

Marx’s statement here is logical and inreality his observation is the same as that ofAdam Smith: "Labour...is the real measureof the exchangeable value of all commodi-ties." It is true that the majority of the priceof a commodity is actually the cost of labourit took to produce it. Seed itself is cheap butit is the cost of the labour of the farmerwhich by and large determines the mini-mum value of wheat. Marx, however, al-lowed himself to get caught up in trying todefine what was the real value of somethingwhich he saw as labour. But he forgot thehuman nature side of competition and theimportance of ideas and the entrepreneurwho plays a large role in Smith’s "invisiblehand." Without the pursuit of self-interest,new innovations come slowly. Marx’s solu-tions were drastic and motivated by a mate-r ia l i st i c je a lou sy a n d b ia s t o wa rd


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interpreting history itself. He viewed thatit was the entrepreneur who exploited thelabour classes to gain his wealth. He triedto compare the wealth of that individual toan individual labourer. He neglected to seethat it was the entrepreneur who createdthe jobs for labour and that the incomederived by everyone he employed vastlyexceeded the income of the individual en-trepreneur. Marx attempted to disrupt thedistribution of income which in itself be-came an injustice upon social freedom. Forit was Cicero who commented in 65 B.C.:"If we all seized the property of our neigh-bors and grabbed from one another whatwe could make use of, the bonds of humansociety would necessarily crumble."

You can see that up until the beginning ofthe 20th century, economists were stillfighting over the very same issues. The an-t it rust laws enacted within the UnitedStates in part struck at this concept of thedistribution of income. The graduated in-come which evolved after World War I wasalso a child of some of the same thoughtsthat enraged Marx himself. The Great De-pression would only further this notion offairness within the distribution of incomeand the blame that would be laid upon thedoorstep of the stock market would merelyserve as the excuse and the tool to reshapea new political economy in the decades thatwould follow.

Off the beaten path came the cyclicallong-term wave theory which was pio-neered by Nicolai Kondratieff, a Russiane conomist who spen t his t ime in re-searching price fluctuations within a basketof commodities. It was Kondratieff whoidentified long-term cyclical waves in priceactivity ranging from 50 to 60 year periods.These waves he identified were 1780-1840,the Industrial Revolution, and 1840-1890.Although Kondratieff essentially believed

that these long waves were something of arhythmic pattern inherent within the capi-talist ic system, he also maintained thatcommunism would not eliminate themeither. As a result, he was sent off to Siberiain 1930 and never heard from ever again.Not much credence has been given to cycletheory in economics. Yet today we are onlybeginning to flirt with the notion that per-haps man’s emotions are driven to therhythmic beat of gravitational forces just asthe moon thrashes the oceans from one sideto the other like clockwork each day. Butthis new and strange thinking process oflooking at the economy from a rhythmicpattern played a role in influencing a latereconomist, Joseph Schumpeter.

But it was at this junction in economicevolution when John Maynard Keynesmade his entrance into this Greek tragedyof financial intrigue. John Maynard Keynesshocked the world in 1923 and again in1936. Keynes took the position that gov-ernment intervention could smooth outthese choppy waves of up and down move-ments within the economy. It would beKeynes who would now shape the destiny ofour modern society as his ideas fell uponeager ears in government. For here at lastthey had someone who in a sense advocatedmore power and responsibility to the handsof government officials who became thenew race of economic demigods of the 20thcentury.

In later years, economics would be furtherexpanded by the theories emanating fromMilton Friedman, John Kenneth Galbraith,Alban Philips, Paul Samuelson and JosephSchumpeter. Friedman would attack gov-ernment in some ways advocating a freemarket economy, and he was perhaps thegreatest spokesman for the monetarist the-ory which asserted that the business cycle


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was largely dictated by the supply of moneyand interest rates.

Joseph Schumpeter took a distinctly dif-ferent approach. He believed that tradecycles and growth were sparked by greatwaves of innovation. He also argued thatthe abnormal profit was the just reward forthe entrepreneur’s innovation which in turnprovided new industries and jobs. It wasSchumpeter who explained the rhythmiceconomic waves of Kondratieff in a funda-mental sense. As some new innovation wascreated, it spread throughout the economyallowing greater expansion. Thus the rail-road expanded the United States both so-cially and economically. But lacking a newstartling innovation, the prosperity con-tracts when the economy reaches an over-expanded state. Thus the innovation of theautomobile indeed helped to expand theeconomy during the 1920s but as competi-tion heightened and the market becamesaturated, it was the auto stocks which firstsignaled that the trend was over when theypeaked during the first quarter of 1929.The secondary industries which had ex-panded on the coattails of the auto industrycontinued higher into late summer and col-lapsed from exhaustion. This would be theessential interpretation based upon Schum-peter’s theory of innovation.

We can see that when dealing with a se-vere depression, economic theory itself hadbeen long divided. Each of these men, in-cluding Marx, caught a glimpse of a piece ofthe puzzle but somehow missed the entirescope of the beast. Each observation wascorrect. Sweat shops did exist at one pointin time, which caused an enraged Marx toadvocate total confiscat ion of privatewealth. But that was not the entire problemand confiscation was not the entire answernor was it the logical human conclusion.The theory of Keynes who advocated gov-

ernment intervention was not the answereither. For politicians argue for monthsbefore they can ever agree and then theactions are often too late because theythemselves fail to understand the true un-derlying events.

The economy is a very complex structure.Dissecting it and trying to figure out whowas responsible for knocking the painter offhis ladder is not easy. Each observation andtheory which we have just briefly looked atwas formed largely within the context of anassumed isolated domestic economy.

It was Sir Thomas Gresham, the financialadvisor to Queen Elizabeth I of Englandback in 1566-1568, who remains famous forhis observation of capital movements.Gresham’s Law is short and to the point -Bad money drives out good. This observa-tion was very profound. Whenever a sover-eign nation chose to increase its moneysupply causing inflation, prior to the inven-tion of paper money it had to do so byflooding the money supply with copper orsilver coins. Whenever this transpired, thepopulation naturally began to hoard themore scarce form of money - gold. We sawthis ourselves during the mid-1960s whensilver coins were being replaced with thecopper-nickel clad coins. Even though sil-ver had not yet risen in value enough tomake smelting the coins profitable, the per-ception that they would be more valuablethan the clad replacements at some point inthe future gave rise to their immediatehoarding. Thus, the bad (clad) drove outthe good (silver).

However, with the invention of papermoney this application of Gresham’s Lawchanged dramatically. During the pre-pa-per currency system, capital movementswere restricted on a domestic basis. Capitaldid not leave a nation unless it was under


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siege by an enemy. Instead, capital wouldrush into gold when it perceived that silvercoins were flooding the money supply. Butin the paper currency system, capital stillflowed into gold as we read during the lastdays of the Great Depression. Particularlyafter Roosevelt essentially made it illegalfor Americans to own gold in an effort toprevent Gresham’s Law from disruptingthe economy, the capital flows becamemuch more intensified on an internationalbasis. Even prior to 1934, capital rushedfrom one currency to another as it per-ceived danger of default on the part of onenation and then another. This basically cre-ated the Monetary Crisis of 1931.

Even though the economy of the 1920swas perhaps not as finely tuned to interna-tional events on a split second basis as it istoday, news still traveled faster than it hadbefore World War I. Capital flowed freelyfor the most part until exchange controlswere instituted during the Monetary Crisisof 1931 by many European nations to stopt he ou tf low o f ca p it al accord ing t oGresham’s Law, which now applied to de-valuations on an international level as well.But by and large, the economic models andthinking of the day were not advancedenough to understand the full impact of thisnew age of world communication. Whenmoney was merely gold coin, hoarding wasthe normal action taken during periods of alack in public confidence. But under a pa-per system even where notes were sup-posed to be redeemable into gold upondemand. people quickly learned that suchpromises were easily broken. Therefore,capital would flow from one currency toanother riding the fears of confidence.Gresham’s Law had become internationallaw.

All things considered, each of the theorieswhich we have just examined was in its own

way correct. Those who argued that goldwas the only true form of wealth were notwrong in so far as gold was the medium ofexchange and that it was the instrument bywhich wealth could be transferred from oneperson to another. Those who argued thata commodity’s value lay in the amount oflabour involved in its production were alsocorrect. Those who saw land as the truevalue of wealth were also correct in theirown way as were those who argued that anation’s wealth lay in its productive capabil-ity or in the size of its labour force. Theproblem that each theory faced was notunique. Each dealt with only a small pieceof the entire puzzle but none of these theo-ries could stand the test of time alone.

You must realize that prior to World WarII, the distribution of employment aroundthe world was distinctly different from thatof today. This is illustrated by the followingtable:

DISTRIBUTION OF EMPLOYMENT 1900 & 1980

US Britain Japan 1900 1980 1900 1980 1900 1980

Agriculture 41% 3% 13% 2% 70% 10%

Manufacture 20% 20% 33% 27% 12% 36%

Services 17% 44% 36% 48% 18% 54%Other 22% 33% 18% 23% --- ---Source: Economic Statistics

We can see by the above table that at theturn of this century, 41% of the civil workforce in the United States was employedwithin the agricultural sector. Today thatsector accounts for only 3%. Obviously,during the 17th and 18th centuries, onecould easily be led to believe that a nation’swealth resided within its land and agricul-tural capabilities. We can also understandwhy the stock market was so closely in tunewith the price movements within commod-ity prices themselves. It is also obvious that


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a drastic decline in commodity prices im-pacted the economy as a whole far moreduring the Great Depression than it wouldtoday. It is also obvious why the cyclicalwaves discovered by Kondratieff basedupon a basket of commodities closely fol-lowed the ups and downs in economicmovement itself.

But things have changed between thenand now. Little talk of commodity pricesimpacting stock movement as a whole isever discussed. Yet there are those who stilltry to employ Kondratieff’s wave, proclaim-ing that the end is near and that anothergreat depression will befall us soon. In allthese statements we are taking apples andcomparing their price movements to that ofoil to come up with conclusions that merelymeet logical sounding arguments on thesurface but lack the definitive knowledge ofevents and conditions long since past.

Because the nature of the economy hasevolved, changing drastically from what itonce was at the dawn of this century, it isonly right that we should reconsider eco-nomic theory in light of these changes andmore. The issues of what is wealth have stillnot been decided. The Monetary Crisis of1931 found people acting as if gold weretheir only concept of wealth. Can we intheory dream up something and proclaimthat yes it is total production which consti-tutes a nation’s wealth, yet in practical cir-cumstances we find that the masses stilladopt the old mercantilist’s concept ofwealth by immediately hoarding Gresham’sgood money gold?

Theory must survive the test of reality, notmerely the academic philosophical discus-sions of a Sunday afternoon on cam pus. Inreality, a nation’s wealth is everything com-bined. It changes form and evolves withtime, ideas, and technology. Labour is

merely a commodity. It is not the extent ofa nation’s wealth. At times the greater thelabour force the less it is worth and themore it drains upon the resources of a na-tion as a whole. For if labour were thewealth of a nation, then China should beamong the richest and Saudi Arabia thepoorest. The theory that labour composesa nation’s wealth does not stand the test ofreality.

The true wealth of a nation lies within itsability to bring to bear its efficient capacityto produce. This was born out by Germanywhich twice rose from poverty into a formi-dable industrial nation within less than 10years. It was the attitude of its people thatinspired its efficient productive forces. Itwas not the amount of gold that she held buther human drive to achieve.

But wealth is still something more. Ittakes the form of many things, but by andlarge there are three forms of wealth and itis the intermovement between these threeelements which must be understood. Themajor dividing line between the variousforms of wealth can be defined as produc-tive and nonproductive. The first is someform of tangible wealth which produces byitself an income. Cultivated land which isharvested is one example of wealth broughtto bear on an income producing basis. Apiece of real estate which is rented out is ina real sense income producing. An exam-ple of non-income producing wealth wouldbe a residential home. It is consumingwealth, not producing wealth even thoughit may serve a purpose and appreciate overtime.

The third form of wealth is the medium ofexchange. This is merely a measure ofwealth yet one which is very necessary. Itallows capital to flow from one form ofwealth, real estate, into bonds or stocks. It


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is the translation dictionary between thevarious different languages in the financialworld.

Great periods of prosperity are alwaysaccompanied by speculation. It is specula-tion in the tangible forms of wealth whichwe call inflation. At times this inflation maybe largely in the price movements of com-modities. At other times it was centeredwithin the confines of land speculation aswas the case in the Panic of 1837. In thePanic of 1907 it was the speculative feverwhich focused upon the innovation withinthe railroads, and during the Roaring 20sthis speculation was centered within theU.S. stock market.

In all cases, the tangible forms of wealth,both productive and nonproductive, in-crease in price rapidly as investors andspeculators are driven to accumulate whatthey can. The medium of exchange buysless and less as time goes on. Those who tryto claim that the stock market did well be-cause inflation as measured through com-modities was low fail to realize that stocksthemselves are merely another tangible as-set which went through its own inflationarycycle.

But we must also come to understand thatthe world was on a paper money systembacked by gold. But, many foreign nationsfluctuated back and forth between a goldstandard and a paper standard. Wealthmoved from nation to nation following thesame laws of Gresham but now in an inter-national arena. This meant that capital nolonger drifted within a single nation butwithin the entire international economy. Itwas not merely the domestic speculation inU.S. stocks that drove the Dow Jones Indus-trials upward by nearly 800% during the1920s, but the international capital flows

that sought a safe port for investment,which was clearly the United States.

The theories that we have looked at wereall basically observations which were madeunder domestic situations. Inflation hadbeen defined as an increase in money sup-ply, which meant that if a nation did excep-tionally well in international trade, moregold flowed into its economy. Hume’s ob-servations were correct that prices then alsorose in response to that increase in the sup-ply of money. This theory was not wrong,but it took on a new meaning during the1920s. Capital had flowed into the UnitedStates but this did not produce inflation interms of commodities. The reason why isthat capital was still in the hands of manyforeign citizens who bought U.S. invest-ment but did not affect the consumer goodsor services. The inflation, therefore, tookplace in the equity markets due to the influxof foreign capital.

All these various theories had to bechanged and altered to take into considera-tion a new force of international capitalflows. Therefore, a rise in the quantity ofmoney in one nation no longer meant thatit was inflationary in the old sense. It nowbecame reflective of a growing interna-tional network of investment and at timesfrightened capital which fled from one na-tion to another.

The economies of the world flow in alogical and orderly fashion dictated by andlarge through the whimsical elements ofhuman emotion. Often logic seems to leaddown a dark and narrow alley and it can bequite deceiving. But if you follow logic’spath religiously, it eventually emerges intoa new realm of understanding.

The one thing you must take into consid-eration is the fact that all these theories


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which we have reviewed were conceivedduring a period when the world was on aone currency based system - gold. Today weno longer have that one world currencysystem and as a result things cannot be com-pared between then and now so easily. Withthe emergence of many diverse issues ofinternational paper money, the conceptsand theories changed from a domestic iso-lated economy to a new world economy.

In reality, all these various theories arecorrect, including those of the mercantilist.The wealth of a nation in all respects is thetotal combined forces of all productive lev-els. However, the medium of exchange isvery important as well. At times duringinflationary periods, land, commodities andstocks all rise in value to the best of differ-ent timetables. But when these sectors ofcapital investment are overextended due tospeculative forces, they tend to outpace thegrowth rate within the medium of ex-change. As a result, when a crack in confi-dence begins as it did in 1929, prices ofthese tangible forms of capital investmentcrash rapidly. This takes place because theyfar exceed in total value the outstandingmoney supply (medium of exchange). Therelationship between the increase in thequantity of the medium of exchange is notin direct proportion to that of the tangibleassets which include everything from stocksto real estate. It is a leveraged relationshipbetween the two sectors and, therefore,during contraction the reverse leverage ef-fect can be quite devastating.

It is because there is far less quantity ofthe medium of exchange available in pro-portion to the total outstanding stocks,bonds, real estate, collectibles, etc., that thevalue of these things in total contract at arap id pace, at tempting to once againachieve a sense of balance or equilibrium.Therefore, in all reality, the arguments

which we have just gone through as to whatconstitutes the wealth of a nation are intotal a mere exercise in futile thought. Thisis because in part each theory is correctwhile not one is totally encompassing thesituation alone.

During expansionary periods, capital in-vestment is drawn to industry for profit be-cause this is where the action is, so to speak.Therefore, if one were to look at the econ-omy as a whole at that particular moment,one would be forced to conclude that it wasindustry that accounted for a nat ion’swealth. During periods of famine, food be-comes the all-important commodity withinthe economy as a whole and therefore itwould be logical that one could concludethat the wealth of a nation at that particulartime was indeed the total agricultural abil-ity of a nation. During the oil crisis of the1970s it was suddenly found that the totalproductive ability of a nation was under-mined by its consumption of oil because thetrading partners who produced the oil werenot consumers of their manufactured goodsin equal proportion. Therefore, oil sud-denly became the most powerful form ofwealth transfer.

Perhaps you can see that it was not themany varied arguments as to what waswealth itself, but the mere fact that eachidea was correct for its time. Indeed theMonetary Crisis of 1931 proved that aboveall, even the old concept that gold was theonly form of true wealth also surfaced asevidenced by the massive worldwide panicand hoarding. All the fancy theories thatclaim that it was not gold but total produc-tive capability of a nation which encom-passed a nation’s wealth did not stand thetest of reality when the world could care lessabout stocks and bonds but instead caredabout the quantity of gold.


550

Each concept of what is wealth is in itselfcorrect under certain circumstances. As mymother always tried to tell me as a child,there is a time and place for everything.Those words are also very true about eco-nomic thought itself in the realm of every-day reality. Therefore, during periods ofcontractions, cash, or the medium of ex-change as the mercantilists saw it, becomesthe most desirable asset to hold. Tangibleassets appreciate considerably during infla-tionary periods and suddenly far exceed intotal market value the total available cashwithin society. It becomes only natural thatthis equilibrium is suddenly driven in theopposite direction to the point where thetwo optimistically seek a par level.

Capital and wealth are in many respectsguided by laws similar to those of the divinelaws of nature. They will flow from onenation to another by an invisible hand whichis as powerful as that within nature itself.Capital will flow from one nation to anotherfor many varied reasons. First, it may beaffected by taxation in modern times suchas today. Second, capital can be driven byfears of a geopolitical nature - war primar-ily. Third, capital is also driven for eco-nomic reasons of stability and security. Ifthe threat of Russia invading Europe be-comes a viable potential, then you mustrealize that capital will flee Europe to thenext safe port, which most likely would bethe United States. These are some of thereasons for the movement within the stockmarket during the events which transpiredduring the 1950s and 1960s.

But there are many other things whichalso move according to this invisible handwhich now transcends all borders. Imaginefor a moment that you are nothing morethan a pawn within the financial game ofchess. But a pawn, who may be of the lowestrank on the board, also holds the power to

place a king in check when joined by otherpawns when the opposing force is recklessin its strategy.

We are all basically like a pawn. Ourlabour is nothing more than a commoditywhich we sell to the highest bidder for themost part while there are perhaps a wisefew who endeavor to place enjoyment andfulfillment above monetary value. If I werea grower of wheat and I decide that mylabour is somehow more valuable thanyours, then the wheat which I cultivate willbe more expensive than that which yougrow. But the buyer to whom I sell myproduce suddenly realizes that perhaps Ihave priced my produce 50% higher thanyours. Eventually, that buyer will wake upand elect to buy from you rather than me.

Within the international economy allthings have a tangible value. It may becomeconfusing at times when everyone tends tojudge their values in a medium of exchangebearing different names and unit struc-tures, but for the most part wheat is wheatno matter what country you may live in.

In the 1980s we can see how Americanindustry has been besieged by imports.Manufacturers have tried to stay competi-tive and in the course of events, they haveshifted much of their factory work to lesscost ly labour nat ions. The Americanworker cannot compete with the worker inChina, Korea, Japan, or the Philippines. Inthis way, manufacture has flowed like waterseeking the lowest level of labour costs in abattle to remain competitive.

The international economy in a strangeway has also been quite similar to baseball.Each team is at least given the opportunityto come up to bat. Over the centuries, it hasbeen the natural order of virtually everysociety for its labour ranks to continually


551

increase the price they set upon their toll.In 63 B.C. the famous Senator of Rome,Marcus Tullinus Cicero, stood before theSenate of Rome and said:

"The budget should be balanced, theTreasury should be refilled, public debtshould be reduced, the arrogance of offi-cialdom should be tempered and control-led, and the assistance to foreign landsshould be curtailed lest Rome becomebankrupt!"

These words are almost applicable to theevents of today just as they easily might beapplied to the events of the Great Depres-sion. Their importance is far-reaching iftaken apart and reviewed carefully. Indeedthe Roman E mpire did crumble fromwithin before the final blows were struck bythe encroaching peoples who surroundedit. Rome fell victim to a social struggle inwhich its population began to feel that itslabour was too valuable. Trade deficitsmounted as labour in outlying provincesproduced goods and services at priceswhich were far more attractive.

Within every great society since the dawnof civilization, this tendency for labour torise in price as prosperity befalls its econ-omy has been present without exception.When the United States was in its infancy,it too was the source of cheap labour forEurope. But as Europe lost its competitive-ness due to rising wages, America flour-ished. As prosperity came to the shores ofthe new world, eventually American labourrose in value and now our unions complainof cheap labour in the Far East.

This is merely one of the natural orders inwhich wealth is transferred from one soci-ety to another. Sumptuary laws and greattariff walls cannot prevent this naturalgravitation and transfer of wealth. Each

society fights hard to hold on to its prosper-ity, but never has any society been success-ful in retaining it.

Everything from labour to commodityprices has this certain mystical interna-tional value. It is hard to measure suchthings without creating a complex basket ofworld currencies in this day and age. Backthen, the pivot point was gold and everyonepegged a fixed amount of their currenciesagainst a fixed amount of gold.

For periods of t ime, imbalances takeplace. Tariffs can be effective for a shortduration of even a few decades, but theyhave never staved off the problem eter-nally. Ironically, tariffs attempt to preservea domestic industry by allowing it to chargemore for its produce than what it can bepurchased for on the international market.Protectionism, therefore, has been popularamong the labour and manufacturing seg-ments of most nations throughout history.In one sense, it holds a kinship with theconcepts of the mercantilists of the 17th and18th centuries. This very issue is but onewhich has forged many a revolution includ-ing that of the United States against Britain.It has taken many various forms such as theKing demanding that the American Colo-nies pay for their goods in gold while theBritish were allowed to pay the Colonists inovervalued copper.

Yet the U.S. government also institutedthe Sherman Anti-Trust Act of 1914 underthe guise that a monopoly could set a pricefor its produce above its true value. Com-petition was deemed to be healthy and theconsumer’s right to be able to buy at thecheapest possible price was the objective ofthis law. Strangely enough, protectionismand anti-trustism are opposing forces benton exactly opposite goals. The break up ofAT&T did not benefit the consumer one bit.


552

Corn Prices expressed in British PoundsB

ritis

h P

ound

s pe

r bu

shel

1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933

0.60

0.50

0.40

0.30

0.20

0.10

0.00

Corn Prices expressed in French Francs

Fre

nch

Fra

ncs

per

bush

el

1900 - 1933

1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933

32.00

30.00

28.00

26.00

24.00

22.00

20.00

18.00

16.00

14.00

12.00

10.00

8.00

6.00

4.00

2.00

0.00


553

Corn Prices expressed in U.S. dollarsU

.S. c

ents

per

bus

hel

1900 - 1933

1900 1903 1906 1909 1912 1915 1918 1921 1924 1927 1930 1933

240

220

200

180

160

140

120

100

80

60

40

20

CORN PRICES IN WORLD CURRENCIES

U.S.-Britain-France-Netherlands

Ann

ual %

Rat

e of

Cha

nge


1918 1921 1924 1927 1930 1933

2.20

2.00

1.80

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00

-0.20

-0.40

-0.60

-0.80

US Britain France Dutch


554

Yet in the original context, that was theobjective of the Anti-Trust Act.

Societies throughout recorded historyhave battled against this age old problem.Thus far the United States was able to im-prove its standard of living above those inother lands not through the benefits of pro-tectionism nor through anti-trustism, butinstead through expanding technology. Asinnovation continues, then new conceptsand new jobs form. As they form, the valuefor the labour required is somewhat higheras skills advance. Only through continuedinnovation can labour hope to improve itsstandard of living and retain it. If no newtechnology enters, then raising the cost oflabour may raise the standard of living tem-porarily, but eventually someone else willdo the job for less. This is when a societybegins to decay.

Labour in many respects is similar to acommodity. When the California gold rushcame, rooms for rent in 1849 were fetchingas high as a $1,000 a month. Gold had be-come so plentiful that its purchasing power

declined drastically. This is what we callinflation. The same is true of labour. Themore specialized a job, the more it is worth.Sweeping a street is hardly a skilled task andthe job can be filled by a greater quantity oflabour and as such it is worth less. Whenwe look at the early 1960s, we will see howreal wages outpaced inflation because ofexpanding technology and a shortage ofskilled labour. But in the 1970s, inflationoutpaced wages when a shortage in labourwas replaced by a shortage in raw materials.

Thus, these natural relationships of supplyand demand as Hume explained do work inall aspects of our lives including the pricewe place upon our own time. The interna-tional implications of this are not often un-derstood. They certainly are not popularslogans to preach if you are running forelection to the Senate or White House. Asa result, politicians give the people whatthey want through protectionistic legisla-tion, which in the long run will not aid soci-ety but in the short run perhaps might stopthe immediate bleeding.

WHEAT PRICES IN WORLD CURRENCIES

U.S.-Britain-France-Netherlands

Ann

ual %

Rat

e of

Cha

nge


1918 1921 1924 1927 1930 1933

2.20

2.00

1.80

1.60

1.40

1.20

1.00

0.80

0.60

0.40

0.20

0.00

-0.20

-0.40

-0.60

US Britain France Dutch


555

Dow Industrials in British PoundsE

xpre

ssed

in B

ritis

h P

ound

s1900 - 1937

1900 1905 1910 1915 1920 1925 1930 1935

120.00

110.00

100.00

90.00

80.00

70.00

60.00

50.00

40.00

30.00

20.00

10.00

0.00

Dow Industrials in French Francs

Exp

ress

ed in

Fre

nch

fran

cs

1900 - 1937

1900 1905 1910 1915 1920 1925 1930 1935

10000.00

9000.00

8000.00

7000.00

6000.00

5000.00

4000.00

3000.00

2000.00

1000.00

0.00


556

Dow Industrials in U.S. DollarsE

xpre

ssed

in U

.S. D

olla

rs1900 - 1937

1900 1905 1910 1915 1920 1925 1930 1935

400.00

350.00

300.00

250.00

200.00

150.00

100.00

50.00

0.00

U.S. & U.K. Industrials Stock Indexes

annu

al r

ate

of c

hang

e co

mpa

rsio

n

(US=S&P 500) (UK=FT Index)

1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%

-20.00%

-30.00%

-40.00%

-50.00%

US S&P 500 UK FT Index


557

Therefore, despite the fact that labourunions might seek to fix the price of labouror that we might feel that because we arehuman beings we are above the mere clas-sification of a commodity. It is completelyfalse. We cannot overvalue ourselves anymore than OPEC was able to sustain a highprice for oil which became far too plentiful.Marx’s theory that labour was the source ofa nation’s true wealth does not withstandthe test of reality.

In all due respect, the Roaring 20s and thefabulous bull market were created by sev-eral key events. First, by the war whichdestroyed the product ive capability ofEurope, leaving the United States as a ma-jor source for civilian and military manufac-tured goods. In addition, the United Stateswas a leading source of agriculture duringthis period and in simple terms it was as ifthe U.S. had attained nearly a monopolyupon world trade. This naturally produceda wealth beyond the scope of imaginationas gold not merely gravitated toward theU.S. due to trade, but also due to the urge

to find a safe port for capital on the part ofEuropeans.

But in the process of these two emergingforces, American labour became overval-ued to a large extent. As the world beganto recover, European workers were willingto work for far less. This in turn led to tradewars not merely between Europe and theUnited States, but within Europe itself.The equilibrium had to once again be re-stored and the natural effects were merelypostponed until the eventful year of 1929.

Thus the Roaring 20s became a period ofintense capital flows that followed upon theheels of confidence, which became shakenby both fiscal irresponsibility as well as war.In studying the capital flow accounts withinthe balance of payments of the UnitedStates, it becomes clearly visible how theinternational capital flows closely paral-leled the movements within the equity mar-ke t s around t he world. The close strelationship of the Dow Jones Industrials iswith capital flows and foreign exchange

Dow Industrials in Japanese Yen

Exp

ress

ed in

Yen

1900 - 1937

1900 1905 1910 1915 1920 1925 1930 1935

1200.00

1100.00

1000.00

900.00

800.00

700.00

600.00

500.00

400.00

300.00

200.00

100.00

0.00


558

movement more so than anything else, in-cluding interest rates.

The movement within foreign exchangemarkets is perhaps the most profound on aninternational economic basis. To illustratethis statement, I have taken the price ofcorn and charted its price movements interms of the British pound, French francand the U.S. dollar between 1900 and 1933.

Let us look at the chart of corn in termsof U.S. dollars. Here we can see that theactual price high was achieved during 1917.During the speculative rally into 1919, corndid not make a new high although it didachieve the highest yearly closing at thattime. Notice also that in 1932 corn hadfallen to new lows for this century in termsof U.S. dollars.

Now compare the chart of corn in termsof British pounds. The price high here tookplace not in 1917 but in 1919. To the Britishconsumer, food was costing more in 1919than it was in 1917 even though this was not

necessarily the case in the United States.Now look at the 1932 low. Corn did NOTmake a new low intraday during 1932 interms of pounds. It held above the low of1900.

Now let us compare these patterns to thethird example, which is corn expressed interms of French francs. Right off the bat wecan see that the 1919 high was exceeded andthat the peak in corn prices in terms offrancs took place in 1927 Not in 1917 nor in1919. The 1932 low in terms of francs waswell above the highs prior to 1915. Al-though we are looking at the same com-modity, the American, British, and theFrench each saw different patterns whenviewed through their own currencies.

Now let us look at corn from an annualrate of change basis using the yearly closingfigures in terms of U.S. dollars, Britishpounds, French francs, and Dutch guilders.We can see that during 1919, corn rose inprice the least in terms of dollars whereas

Net Capital Flows in U.S.

in m

illio

ns o

f dol

lars

Capital Accounts Assets-Liabilities

1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937

2500

2000

1500

1000

500

0

-500

-1000

-1500

-2000


559

the greatest price rise was in terms ofFrench Francs.

For the most part, corn prices remainedmore volatile in France than in any othernation. This was not because of corn itself,but because of the swings within the Frenchfranc on the foreign exchange markets.

We read for ourselves that the idea ofcurrency inflation under Roosevelt had itsgoal of creating a rise in the price of com-modities in terms of the dollar. If we lookat this rate of annual change in corn prices,we will see quite clearly that the highest rateof change in 1933 took place within theprice of corn in terms of dollars. Corn rosein terms of dollars nearly 220% whereas interms of pounds, francs and guilders, cornrose less than half that amount.

Therefore, corn did double in value on aninternational level while in the eyes of theAmerican it better than tripled by the endof 1933. If one were to ascertain what thetrue appreciation of a commodity might be,he must not only take into consideration the

domestic inflationary pressures, but the de-preciation or appreciation of the currencyin which he is trying to make his calcula-tions.

Let us now take a look at three chartswhich have been provided for the DowJones Industrials expressed in terms of dol-lars, pounds, and francs. The chart of theDow in terms of U.S. dollars illustrates thatthe high achieved in 1937 virtually bouncedoff the low which had been established in1929 at the outset of the famous panic. Nowlet us compare this same technical point interms of British pounds and French francs.The Dow in terms of francs illustrates ashocking difference. Here the 1937 highcame very close to reaching the 1929 high.This pattern was caused by the drastic de-cline in the French franc in comparison tothe dollar on world foreign exchange mar-kets. Therefore, the French investor inAmerican stocks clearly experienced thewildest swings within his American portfo-lio.

Net of U.S. Capital Flow Accounts

in m

illio

ns o

f dol

lars

(+)= inflow (-)= outflow

1919 1922 1925 1928 1931 1934 1937 1940

2500

2000

1500

1000

500

0

-500

-1000

-1500

-2000


560

U.S. Dollar Index 1900=Par

Source: Princeton Economics

U.S

. Dol

lar

1900

= P

arMONTHLY CLOSINGS: 1919-1934

1919 1921 1923 1925 1927 1929 1931 1933

1.60

1.50

1.40

1.30

1.20

1.10

1.00

U.S. Dollar Index 1900 = Par


U.S

. Dol

lar

Inde

x 19

00 =

Par

$1


1927 1928 1929 1930

1.15

1.14

1.14

1.14

1.14

1.14

1.13

1.13

1.13

1.13

1.13

1.12

1.12

1.12


561

Before we look at the British chart, lookagain at the French chart and take closenote of the pattern which emerged after1916. Note that while the U.S. stock marketcollapsed following the peak in 1919 into amajor low during 1921, in terms of Frenchfrancs, the Dow held a fair amount of itsgains. The uptrend was clearly intact, af-fording good reason why French invest-ment looked upon the U.S. market in a veryfavorable light.

Now let us move on to the Dow expressedin terms of British pounds. Note here thatthis 1937 high failed to reach the low of1929. This was caused by the fact that thedollar had actually depreciated against thepound under the inflationary policies ofRoosevelt. On an international purchasingpower basis, a U.S. investor who sold hisstock when the Dow was at 200 in 1929would have actually been able to purchasemore British goods than the investor whosold his stock at 200 points in 1937. On anet tangible basis, the Dow was actually20% below its same levels of 1929 on a

foreign exchange basis when using the Brit-ish pound as the medium of measure.

Perhaps you can begin to see that foreignexchange plays a very big role in the move-ment of all markets. We read first hand thatfor the most part the commentary concern-ing the U.S. stock market up until 1927 wasby and large net bearish. New highs werealways questioned largely due to domesticconsiderations. As a result, the foreign im-plications which made the U.S. stock mar-ket attractive overseas were by and largeignored due to the lack of understanding atthe time.

Today we find foreign investment fundsboasting of large and impressive returns.But in reality, these returns have again beencaused by foreign exchange movement. InCanada, investment funds in Japan havebeen very popular in 1986. These offshoreinvestment funds have run numerous ad-vertisements headlining 50 to 60 per centreturn in a single year. The uninformedinvestor looks at such returns as an excel-lent or fantastic investment opportunity.



U.S

. Dol

lar I

ndex

190

0 =

Par

$1

MONTHLY CLOSINGS: Jan 1929 - Aug 1931

1929 1930 1931

$1.1460

$1.1440

$1.1420

$1.1400

$1.1380

$1.1360

$1.1340

$1.1320

$1.1300

$1.1280

$1.1260

$1.1240

$1.1220

$1.1200

$1.1180


562



U.S

. Dol

lar

Inde

x 19

00 =

Par

$1

MONTHLY CLOSINGS: Sept 1931 - Jan 1933

1932 1933

$1.5800

$1.5600

$1.5400

$1.5200

$1.5000

$1.4800

$1.4600

$1.4400

$1.4200

$1.4000

$1.3800

$1.3600

$1.3400

$1.3200

$1.3000



U.S

. Dol

lar

Inde

x 19

00 =

Par

$1

MONTHLY CLOSINGS: Jan 1933 - Jan 1935

1933 1934 1935

$1.5000

$1.4500

$1.4000

$1.3500

$1.3000

$1.2500

$1.2000

$1.1500

$1.1000

$1.0500

$1.0000


563

However, in reality the Canadian investordid not make a profit because the Japaneseinvestments were better than those in hisown country. The Japanese yen advanced73% between 1985 and the summer of 1986.Therefore, if a stock fund investing in Japanrealized a 60% gain, it did not really makea true "net profit" over and above the inter-national purchasing power. In order for thefund to have actually made a true profit, youmust subtract the foreign exchange gains of73%. If no gains were made above theforeign exchange movement, there was noreal net profit on an international level.

Nonetheless, the average investor haslooked favorably upon foreign investmentin 1980 not realizing that in all due respecthe has been merely playing the foreign ex-change markets and not true foreign invest-ment as long as those gains fell short of theforeign exchange movement. This was alsothe case during the 1920s but then gains inthe U.S. stock market did exceed the for-eign exchange gains for the overseas inves-tor. Therefore, the U.S. stock market

became an attractive bull market notmerely because of the innovation of manynew industries, but because the foreign ex-change movement yielded an additionalplus for the European investor in U.S. mar-kets.

Despite the bearishness which prevailed,we can see that the U.S. stock market re-mained attractive to foreign investmenteven though the domestic analysis withinthe United States did not share in that op-timism. If we now look at the U.S. capitalaccounts, we will find that the actual swingswithin capital flows between the U.S. andthe balance of the world corresponded tothe turning points within the Dow JonesIndustrials.

The Net Capital Flows chart covering1927 to 1937 clearly illustrates several im-portant trends. Note first of all that thecentral bank intervention came in 1927 atthe peak of capital movement into the U.S.economy. From 1927 onward, we find thatcapital did gradually begin to turn away

U.S. Dollar Index 1900 = 100


valu

e co

mpa

rison

to fo

reig

n ex

chan

ge

MONTHLY CLOSINGS: 1900-1950

1900 1910 1920 1930 1940 1950

1.80

1.70

1.60

1.50

1.40

1.30

1.20

1.10

1.00

0.90


564

from the U.S. but still not significantly until1930. Foreign buying within the U.S. stockmarket was at its peak in 1927. However,overall, foreign buyers were active between1921 and 1927. This act ivity began togradually die down and you will recall thecommentary in 1929 that it was the foreignselling which initially began to show up inJune just prior to the decline from the Sep-tember 1929 high. The withdrawal of capi-tal continued from 1923 into 1931 but if yourefer to the commentary in 1932 once againyou will note that it was the foreign buyingat the low which provided support in themarket. It was not that the foreign buyershad a superior knowledge of when to buy orsell the stock market in the United States.What it really had to do with was theirtendency to buy or sell according to foreignexchange considerations. Therefore, it wasforeign selling in 1929 which helped to etchthe peak in the Dow and foreign buying in1932 which help to carve the "V" shapebottom.

The second chart illustrating the NetCapital Flows of the U.S. covers the period

of 1919 & 1940. Here you will note that thepeak in capital flows into the U.S. come in1919 at the height of the inflationary rally inboth commodities as well as stocks. Youwill note that during the 1921 - 1927 period,not one single year turned toward a nega-t ive outflow. Capital investment stilldrifted steadily toward the U.S. market-place adding to the confusion of the domes-tic analytical community as it helped toproduce the Greatest Bull Market in His-tory.

Gresham’s Law undoubtedly worked onan international scope far beyond the ex-pectations of the contemporary analysts ofthe day. The movement of the dollar itselfwas a key role in the overall trend of thetangible investments within the UnitedStates. In trying to obtain a clear perspec-tive of the dollar and its movements duringthe era, I created what I have called the"U.S. Dollar Index 1900 = Par." In effect,all the various currencies from Europe,South America and the Far East have beengathered together in a basket. The startingpoint was chosen as 1900 and this point has

Differential Comparison of Inflation

Net

Diff

eren

tial:

Ann

ual R

ate

of C

hang

e

British & French CPI - US CPI Rate

1915 1918 1921 1924 1927 1930 1933 1936

0.3

0.25

0.2

0.15

0.1

0.05

0

-0.05

-0.1

-0.15

Britain France


565

been taken to equal $1 or par. This Indexdoes not measure inflation nor any otherfactors and it is NOT weighted according toeconomic strength. It simply measures thebroadest possible basket of currencies andtracks that basket relative to the startingpoint which is 1900.

Here we can see in the chart providedcovering the period of 1919 to 1934, that thevolatility within the dollar itself was verydrastic. The dollar rose to its first majorhigh during this century in 1920 after theU.S. stock market had peaked the year be-fore. Between 1922 and 1931, the dollarhad been manipulated for the most parttrying to support the European currencies.This undervaluation of the dollar duringthis period eventually gave way to realityonce it became understood that the U.S.was in fact not going to abandon the goldstandard in late 1931. The defaults of for-eign government debt issues, including thedefault of Britain, drove the dollar upwardat a pace which far exceeded anything imag-inable by today’s standards.

There are several other important pointswhich this Dollar Index tends to illustrate.The period of 1927 to 1929 begins with thecentral bank intervention which attemptedto manipulate the dollar downward andends with a rush into the dollar followed bythe stock market panic. Let us now look ata detailed chart of the monthly closings inour Dollar Index for this period. Note the17% rise in the dollar between December1927 moving into June 1929. This 17% risewas small in comparison to the drasticswings following World War I and thoseduring the aftermath of the Monetary Crisisof 1931. However, this illustrates that theinitial selling which came in at the peak inthe stock market from foreign sources earlyin the summer of ’29 corresponded to thepeak in the dollar itself which was in June1929 nearly 3 months prior to the peak inthe stock market. We also see that from theJune high in the dollar, there was an initialdecline into July 1929. That was followedby a small rally into August which in effectwas a technical reaction pattern testing theprevious high. From there onward, the dol-

U.S Unemployment as % Civil Work Force


annu

al p

erce

ntag

e ra

te

1919 - 1940

1919 1924 1929 1934 1939

26

24

22

20

18

16

14

12

10

8

6

4

2

0


566

lar fell rapidly straight down into December1929.

Foreign selling in the U.S. stock marketduring the early summer of 1929 was by andlarge sparked by the peak in the dollar.This provided the incentive for overseasinvestors to take profit even though theDow Jones Industrials continued higheroverall.

If we now look at the period from 1929moving into August 1931 just prior to theBritish default and the Monetary Crisis of1931, we can see that the trend in the dollarwas fairly steady after the initial panic in1929. We can see that the lowest pointcame in July 1930 when the dollar dippedunder $1.12. This followed the initial paniclow in the Dow which came during June ofthat year when the Smoot-Hawley TariffAct was signed. The tariff issue was indeeda stabilizing factor for the dollar itself onforeign exchange markets.

We can also see in the detailed chartcovering the September 1931 period on

through into December 1932, that the dol-lar’s strength was also an important factorin creating the attraction for overseas in-vestment to return into the U.S. stock mar-ket in 1932. The dollar rose out of theMonetary Crisis of 1931 into an initial highestablished during February 1932. It de-clined into March, rallied back into Apriland fell for the last time into May just priorto the low in the stock market. The foreignbuying was noted in U.S. equities at the verybottom in the Dow during June of 1932.This buying, coincided with the breakout inthe dollar to new highs exceeding the dou-ble top pattern established during Februaryand April of that year. The dollar contin-ued to rally into December of 1932 and thenbegan a collapsing pattern as internationalfears spread over the upcoming inflationarypolicies of Franklin D. Roosevelt.

Between January 1933 and January 1935,we can see that the trend in the dollar wasvirtually straight down until it reached bot-tom during April 1934. This decline wascaused by the fears that a devaluation wouldcome about as rumor eventually turned into

Differential Between Corp & Treas Yield(Moody’s AAA - Treasury Bonds)

1929 1931 1933 1935 1937 1939

1.4

1.3

1.2

1.1

1

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.1

0


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reality. The devaluation of the dollar inJanuary 1934 through the means of inflatingthe price of gold from $20.67 to $35, hadcreated nearly a 30% decline in the value ofthe dollar on world foreign exchange mar-kets.

If we look at the chart of the Dollar Indexfor the period 1900 to 1950, there is anotherimportant point to take note of. The lowwhich was made during the Roosevelt de-valuation in 1934 was above the previouslows prior to the peak in 1920. Gold was$20.67 prior to 1920 whereas in 1934 it was$35. Theoretically, the 1934 low shouldhave been under that of even the 1900 parlevel. Yet it was not! Still the dollar re-mained well above the major lows prior tothe period which illustrated a very impor-tant point. The fact that the 1934 low hadheld above all previous lows during the 20thcentury indicated that capital world-widestill looked quite favorable upon the U.S.markets despite the short-term considera-tions. Indeed, the trend in the dollar wouldcontinue higher into the decades to comeand the long-term confidence for foreigninvestment in the United States would be aleading factor in creating the modern eco-nomic system of today.

Foreign exchange is not the only motiva-tion behind international investment andcapital flows among nations. Inflationarytrends in one nation compared to anotherare an important influence as well. Here wehave a chart which illustrates the differen-tial between the British and French infla-t i on r a t e s a cco rd in g t o t h e ir C PI(Consumer Price Index) and that of theUnited States. The dark bars are Britainand the light are those of France. We cansee that up until 1917, the rate of Britishinflation had remained above that of theU.S. and in 1915 it had been as much as 25%over and above the U.S. domestic inflation

rate. The strict deflationary policies takenby Britain killed the pound during the early1920s as well as their economy. The Britishwere successful in keeping their inflationrate under that of the U.S. until 1928.

But the story in France as in most otherEuropean nations was notably different.With the exception of 1917 and 1921, theinflation rate in France had remained abovethat of the United States. This is also truefor most of the Far East and Japan. Thesimple rate of inflation being greater inother nations was a positive factor in help-ing to create the bull market of the 1920s inthe United States. Capital tends to flow onan international level toward nations wherethe purchasing power will not erode so ra-pidly. This tends to be one factor behindnot merely market movements, but also in-fluences capital flows and foreign exchangemovement as well. The sharply higher ratesof inflation in other nations tended to sheda positive light upon U.S. investment duringthe bull market. It was also the fears ofRoosevelt’s inflationary policies whichcarved a peak in the dollar during Decem-ber 1932 and the low moving into April1934.

Therefore, David Hume’s observations ofinflationary trends not merely apply to strictdomestic economies but it also plays a ma-jor role within the ent ire internationaleconomies. If one nation is experiencing anannual rate of inflation in the area of 100%,then even another nation with a 50% rateof inflation will appear to offer an island ofstability by comparison. International capi-tal flows will tend to follow the world infla-tionary trends as well. This is why whenRonald Reagan was elected to the Presi-dency of the United States, the "confidence"in the fact that he was serious about endingthe inflationary trends in the United Statessparked an immediate "anticipat ion" of


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such and event and inflation began to sub-sided right there and then. It was this newlevel of "confidence" which most misread inthe overall trend for the dollar between1980 and 1985.

It was this anticipation of a trend changewith Ronald Reagan in 1981 which alteredthe events of recent economic history. Itwas also the anticipation of the change intrend under the Roosevelt administrationwhich sparked the fears of inflation drivingthe stock market higher along with com-modities while the dollar declined. In bothcases, the free market forces reacted in "an-ticipation" prior to any official action beingtaken. During the Depression, no one an-ticipated higher prices. They lost their op-timism so to speak. This is what not onlycreated the Great Depression from an eco-nomic perspective, but also from an emo-tional perspective as well. Therefore, eventhough Roosevelt’s policies failed to re-store a healthy robust economy as evi-denced by the 1937 recession, those policiescreated an anticipation that prices wouldrise under the guides of devaluation andthat they did. Once people believed thatprices would rise, speculation returned.Prior to that, speculation had nearly died inso far as no one in 1932 anticipated a changein trend or sharply rising commodity prices.

We can see that the trend in U.S. unem-ployment began to subside in 1934 from thepeak of nearly 25% in 1933. But the infla-tionary policies of Roosevelt managed toonly artificially extract price advances in themarketplace as commodities and equitiesrose seeking to readjust to their interna-tional purchasing power. But the unem-ployment rate remained high declining toits lowest point in 1937. But that declineleft unemployment substantially higherthan the previous record high which hadbeen established during 1921. It was not

the New Deal which lowered unemploy-ment, but the advent of World War II.

This intangible level of confidence canalso be seen in the differential betweencorporate AAA bond yields and that of theU.S. Treasury. Oddly enough, during ro-bust periods of prosperity where confi-dence runs high among the private sector,the yield differential between corporateand Treasury yield on long-term bonds nar-rows. The chart provided here illustratesthe net differential between Moody’s AAAbond yield and that of Treasury bonds. Wecan see that the net differential widenedduring the Depression peaking at above1.3% in 1932. Note that the differentialbetween corporate and Treasury bondyields declined during the inflationary pe-riod bottoming exactly when the stock mar-ket itself peaked during 1937. To a largeextent, this illustrates that during periods ofprosperity and rising market prices, confi-dence within the private sector rises allow-ing corporate yields to decline in respect tothose of governmental. During periodswhere confidence in the economy itself de-clines, corporat ions are forced to payhigher yields to attract capital away fromthe perceived safer bonds offered by theTreasury.

But this chart also illustrates another fac-tor in the private versus public confidencegame. Note that during the Monetary Cri-sis of 1931, the differential between corpo-rate and Treasury yields declined onceconfidence in governmental issues wasshaken. Confidence itself is a force whichnot merely flirts with international consid-erations, but also with domestic considera-tions to the point that the private sectortends to compete against the public sector.It is that human element of emotion whichtends to judge situations on all levels com-paring investment in one nation to that of


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another as well as between public and pri-vate sectors within each nation.

In conclusion, the forces which mergedtogether forging what became not only theGreatest Bull Market In History as well asthe Greatest Crash in history, were diverseand invisible to those of the time. There isno doubt that the influences were interna-tional and not of domestic origin within theUnited States nor within any other singlenation. They were the combination ofmany events spurred onward by a distrust-ing world who was perhaps at peace with thesword but not in the financial arena.

The Crash was not the single-handed re-sult of speculation nor was it delivered byblunders attributed to Hoover. The Crashwas not the child of Smoot-Hawley but itwas the child of warring financially drivennations. To claim that it could have beenpreven te d by increasing governm entspending in the United States is as absurdand as impractical as claiming that the bullmarket was created by shoeshine boys whodabbled in the market toward the end.

All those who have attempted to blamecertain sectors or factions within societyhave all had their personal biases as fuel fortheir motives. The press did not make thebull market. As we read for ourselves themajority of commentary had remainedbearish even into 1928. As is the case today,when the press finally became impressedand the stock market monopolized thefront pages, the end was not far behind.

The Greatest Bull Market in History wascreated for the most part by war. WorldWar I had torn the very fabric of Europeapart leaving the United States not merelythe manufacturer and supplier of food, butalso the reservoir for frightened capital.That capital concentration which initially

peaked in 1919 within the United States,lined the pockets of American businesswith the seed capital which began one giantleap forward in economic progress. Thebirth of the mass produced automobilesand even the airplane brought forth newwaves of expansion within the U.S. econ-omy. It was not merely this attraction whichlured foreign investment to Americanshores, but the turmoil which still raged onthroughout Europe.

Despite the fact that the war was over, warstill was being waged between nations onfinancial battle grounds. This left an unset-tled foundation upon which to build thefuture. The demands placed upon Ger-many were unrealistic but this was not rec-ognized until after the Monetary Crisis of1931.

The Great Depression was an emotionaldepression sparked by a massive contrac-tion in the value of tangible assets world-wid e . T h e a p pr e ci a t io n o f do l la rdenominated assets far exceeded the in-crease within the money supply itself.When the liquidation began, tangible assetsat inflated prices out numbered the moneysupply by better than 25 to 1. As a result,tangible assets including stocks, bonds andreal estate, contracted in price rapidly in anattempt to realign itself with the vastlysmaller supply of money. In part, those whosought to blame the Federal Reserve forcontracting the money supply and Hooverfor not increasing government spendingenough, were touching upon this aspect.But this is a double edged sword. If inflationis defined as an increase in the quantity ofmoney versus tangible goods, then onemight understand t he fears of the Fed dur-ing this period. However, the U.S. tangibleassets were inflated in value not because ofdomestic policies as much as internationalconsiderations. Therefore, if it is true that


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the lending ratio as we read earlier was 13to 1 based upon gold reserves, theoreticallythe Fed would have had to have increasedthe money supply 13 times to have stabi-lized prices at the 1929 levels. You can seethat such massive expansion is not only im-possible in the space of 1 to 2 years, thisunderstanding of the forces of confidenceand leverage were not present.

In reality, the swings within the economyare a constant battle between the forces ofpublic and private confidence. Theseforces are ongoing and live on as vividlytoday as they did then during the 1920s aswell as within the monetary crisis periodswhich preceded them during centuries longsince forgotten. Whether or not such con-tractions lie ahead in our future dependsgreat ly upon this balance between theforces of public versus private confidencein combination with the political under-standing of the whole. The Great Depres-sion was in reality the break down of theworld economy and the leverage obtainedthrough expanded credit turned aroundinto a reverse leverage which came back to

haunt society internationally. Whether theover-leveraged debt situation through thealarming outstanding international govern-mental loans will once again spark a breakin world confidence levels seems at leastpossible in the years ahead. Indeed todaymanipulation is viewed as a means to anend, but that end may not be any differentthan in prior scripts.

The blame for the events of the GreatDepression does not rest upon the shoul-ders of one man, nor group of men withinsociety. It does not even rest upon the man-tle of any particular sovereign nation. Thecauses are equally shared among all nationsand all political parties. They did not sud-denly emerge in 1929 out of the clear bluesky. They festered and grew being multi-plied by many and in the end, magnified byall.

Trying to second guess the future is neveran easy task. The decisions we often makesometimes grow up and come back to biteus. Getting from point "A" to point "B" mayoften appear to be a straight line. But when


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you try to draw that line, there is never aguarantee that the straight edge won’t slip.With the passing of time we all tend to growolder. But those changes which take placein our own personal appearance cannot beseen each day when we look at ourselves inthe mirror. But pull an old photograph outof the drawer and soon you will see just howmuch hair has been lost, how much weightgained, or how many wrinkles and bagshave gradually formed miraculously beforeyour very eyes.

Such is the case with the long-term effectsand trends within society as a whole. Eachstep we take as a nation or as a group, eachdecision combines to shape our destiny asin our own lives. Each little decision wepersonally made in life has fulfilled our owndestiny. Who we decided to marry. Whatcourses we took in school. The friends wechose to keep. And the dreams we onceused to motivate our goals. It is like stand-ing before a mirror. We cannot see howthat particular decision will affect the out-come of our life years ahead. We can onlyjudge it within the context of that very mo-ment. Such was the case during the GreatDepression.

Everyone chose to place the blame uponsomeone else never once trying to under-stand what was behind the events of the day.Each subtle decision politicians had madeto expand world trade through increasingforeign loans to attempting to manipulateforeign exchange, all played a major role inthe outcome. No one could step back toview the problems from afar and insteadacted rashly with tariffs, embargoes, taxa-tion, political slander and witch hunts whichmade a mockery of the very dreams whichonce sparkled in the eyes of a lady who hadstood proud and tall in New York harbor.

We pay for our mistakes made rashly or inhaste be it within our personal lives or col-lectively as a society. Circumstances maychange and had they been foreseen thenperhaps we may have made a different de-cision. Nonetheless, we all pay dearly forthose rash or poor decisions eventually be-cause each and every one of them combinesto form our personal destiny. There isnever any going back to correct them. Op-portunity knocks, but only once and if thedoor is not opened, the future will be filledwith nothing more than a bunch of "what ifs"or "should haves." Once decisions are made,they are made forever!

The future is the product of our personalhopes, dreams, failures, fears and misgiv-ings. Every time we shy away from some-thing which our gut told us we should havedone, the price will eventually be paid in theend. We cannot run away from ourselvesnor our inner feelings no more than societycan run away from the reality of its trans-gressions.

Collectively, each subtle movement be-tween the markets as they interact with oneanother is as important to the entire pictureof the economic world as those small eventsin our own personal lives. The combinedforces are poised together in harmonywhich in the end are cast upon the winds offate.

Society is managed by our politicians whoare as human as you or I. They too are notfree from their human errors and the deci-sions which they have made collectivelyfrom one administration to the next haveindeed combined and molded the world inwhich we now exist. Their rash decisionsfor war and power or decisions to raise taxesrather than balance current budgets, haveall shaped and molded today’s world. It wasthe over extension of debt in the 1920s


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which came back to haunt the world duringthe Monetary Crisis of 1931. Each trans-gression, each attempted manipulation, allformed a part of the whole. Nothing is toosmall or insignificant. Nothing exists nordoes it take place without some meaningand long-range effect.

Often we seem to think that there is some-one in control. Someone who is all power-ful in the marketplace deciding whethertoday shall be an up or down day for us all.But the truth of the matter is that there isno one great demigod in stocks nor in com-modities. We are all moved by one anotherand our lives indeed cross paths. But stillnothing takes place in that financial arenanor in our personal lives without shapingand molding our own future.

The events of the Great Depression weretragic. The pain and suffering among thosewho lived through it goes beyond descrip-tion. Many who under normal circum-st a nce s wou ld ha ve p r ospe r e d losteverything they had becoming a mere vic-tim in a contracting world obsessed with selfpreservation.

There have been many analysts in numer-ous fields. Often they have argued uponone premise or another each based upon asingle piece of the entire puzzle. No onehas the answers in the palm of his handbecause the beast is too large for us tocomprehend. There are those who toy withthe meaning of life and ponder the alphaand omega never truly understanding muchmore than what has already been written.The mysteries within the movements of theeconomy are as profound and as perplexingas life itself because it is not stocks or bondsnor even gold which rises and falls of its ownaccord. It is the human action and reactionwhich one charts and attempts to forecast.It is man chasing man in a battle of self

preservation in the financial arena of mo-dern survival.

There are rhythms to this perplexingmovement even though at times it mayseem to have none at all. These rhythmswhich the markets and the economy possessare endless in their own right and theirmovements have been tied to everythingfrom the stars and the changes in the tide ofthe seas to the greed of an entrepreneur.But still nothing has yielded the golden keyto their fortune for the secret does not liein a single resting place. The bonds impactcommodities, which in turn impact thebonds. And this is merely the beginning forthen the formula grows to include stocks,gold, foreign exchange, real estate, interestrates, foreign trade, taxes, politics, finance,inflation, deflation, recession, boom, pros-perity, poverty and war. Then the formulaexpands even greater for all these thingstake place within each nation among theworld of nations, and in turn each nationthen interacts with one another.

The combination of this vast array of vari-ables is beyond the scope of our imagina-tion. Just as a stone cast into the center ofa lake sends waves which impact the shore-line on all sides, each movement, no matterhow subtle, each decision, no matter howsubtle, has a lasting effect upon the destinyof the whole. It is inescapable. This is theanswer to why it became possible for theNational Debt of the United States to dou-ble in less than 5 years during the 1980swhile the dollar rose to record highs in 1985around the world and inflation plummeteduntil it reached its low in that same year.The text book impossibility became realitybecause the forces around the world offsetour supply demand expectations.

Life itself has its beginning and its end. Itis never straight up, for it has its peaks and


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then there are the deep valleys. Society ismerely the combination of many cycles ofli fe itself. No civilization has reached im-mortality. Man has abused and misman-aged each of his dreams. True freedom anddemocracy seems to be one of those dreamswhich has undergone numerous transgres-sions. Man’s jealous nature has alwaysbrought the means to a dismal end and theGreat Depression was indeed a crisis indemocracy. Shifting the blame upon thestock market or the rich did not solve theproblems but instead it merely generatedothers and clouded the true deeper errorsmade by society as a whole.

No market has ever rallied continually.A ll booms and fads come to an end. Theperiods of economic expansion and pros-perity are always longer in duration becausewe as human beings take more time in giv-ing our confidence to someone or something. But periods of depression are alwaysswift and to the point with a duration far lessthan periods of expansion. We may all takeour time before we become convinced thatgold is really going to rise but we all actquickly out of self preservation when pricesbegin to tumble. As a result, the economyas a whole has acquired oscillating cycles ofboom and bust. For it is man himself whichhas impressed those actions and reactionsupon society as well as the economy as awhole.

Many have recanted the wave theory ofKondratieff while others have laughed inamusement. Does the Kondratieff wave of-fer a valid road map of the future? Or is ita bunch of wavy li nes that add up to noth-ing? Unfortunately, most people have noidea of what the Kondratieff wave is allabout. The wave was discovered by thisman after studying the price movements ofa basket of commodities. But in 1900 41%of the total U.S. work force was employed

in the agricultural sector. In 1950, agricul-ture accounted for only 11% of the totalwork force. In 1980, the percentage of ag-r icul tural workers had diminished tomerely 3%. Obviously, if an economy were41% dependent upon the mere movementwithin the commodity prices, the cycleswithin commodit ies themselves wouldclosely mirror the economy as a whole.

Those who lack the understanding of allthe forces within the economy and how theyplay a special role within the complete pic-ture have also failed themselves to under-stand the significance of the cycli cal work ofKondratieff. As a result, they have made arash judgment and then attempted to applythe Kondratieff wave to the stock market,bonds, gold and even the economy. The netresult has been dismal failure. Instead ofpredicting another "Black Tuesday" as in1869, they have misread the entire overalloutlook of what this wave has to offer man-kind.

The Kondratieff wave perhaps grew infame only during the mid-1973s after it ac-curately portrayed the peak in commodityprices along with the stock market. Thewave itself is not indicating an economiccrisis as many have tried to read into it.Instead, the Kondratieff wave continues toaccurately portray the movement of com-moditi es as a whole for which it was origi-nally based upon. Coincidentally, when aneconomy during the 1800s was dependentupon commodities for nearly 60% of itsemployment rate, the economy will foll owthis cycle accurately. But that relationshipis no longer the case today.

The real significance in this wave and itsvalue to us for the future does not li e in itsominous forecast for an economic collapsebut for an economic revival. This wave in-dicates that we are in a bottoming out phase


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in commodity prices on a whole includingoil. The years ahead will not bring disasterin terms of deflation, but instead the otherside of the coin will be at hand. The yearsahead will begin to show a marked increasein inflation particularly after 1987. Com-modities themselves effect price levelsoverall but when they decline only thosedirectly involved in their production suffer.Users reap the benefit of their lower prices.

The forces of deflation and inflation co-exist within the same plane. It is as if theywere the elements of heat and cold. Whencold becomes severe it too is capable ofburning flesh. Although these two forcesare opposite, when left to their extremesthey both possess the capability of destruc-tion as far as human life is concerned. Theforces of deflation and that of inflation mayalso appear to be opposite trends but whenalso left to their extremes, they too willdestroy an economy.

Therefore, the Kondratieff wave or anyother wave need not predict the destructionof an economic order through the solemeans of deflation as was the case in theGreat Depression. The future may just aseasily be faced with an ominous inflationaryforce. The outcome has been decided bythe mistakes of the past.

Just as in our own lives each subtle littledecision has merged over time to shape andmold our destiny into what it has becometoday, the political decisions of manythroughout this century have also com-bined to shape and mold our current situ-ation. It is impossible to unravel such amontage of poor decisions within the eco-nomic structure without destroying the veryfabric which holds it together. Once theforces have been set in motion, they be-come impossible to stop.

As we emerge into the years ahead, evenstronger events will be seen. The stockmarket will continue to rise even thoughinflation itself will rise as well. Hopes forthe promise land where interest rates re-main forever low will not grace our doorsteps in the years ahead. All the subtle littlemistakes society has made these last fewdecades will continue to grow bigger add-ing confusion to the reality of everyday sur-vival. The Kondratieff wave is not warningof a deflationary age which will end in adismal collapse, but instead it warns of aninflationary age about to dawn. It is callingfor the bottoming out of the long- termforces in deflation and the resurgence ofinflation.

The rally out of 1932 was one based uponthe fears of inflation sparked by Roosevelt.Stocks, said the Wall Street Journal in 1933,were everyone’s hedge against inflation.

Perhaps this might sound quite foreign toyou in this day and age when we are brain-washed into thinking that stocks only dowell with low inflation and low interestrates, but nonetheless it is very true. Wheninflation takes place, the value of yourhouse rises. So do the assets of corporationsas well. We are on the verge of a new era inanalysis where the books must be rewrittenand understanding broadened. When to-morrow comes, she will bring new relation-ships between the markets and a newmeaning to the word confusion. The think-ing process behind the markets which wehave reviewed throughout the 1920s willagain emerge during the late 1980s. Thefears of the Fed and government interven-tion will give way to the fears of mismanage-ment and international volatility. Marketsaround the globe will gyrate with greaterfrequency and price movement as capitalwill once again shoot from one nation toanother like the loose cannon described by


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Herbert Hoover during the Monetary Cri-sis of 1931.

The publi c trust or confidence has begunto shift away from the public sector and itwill be lured into the private sector as wecontinue to move into December 1989. U l-timately, the forces of reali ty will overpower the mixed up thinking process oftoday. The reverse leverage effect by con-tracting world credit and expanding debtwill once again rear its head as it has before.

I t has been the sheer confidence whichReagan brought to the off ice which beganthe decline in inflation between 1981 and1985. I t was the anticipation of the peoplewho believed that he would turn thingsaround thereby pulli ng back on their infla-tionary expectations themselves. In reality,the deficits continued to mount. Not be-cause of defense or any other programswhich Reagan instituted. The cancer withinis the interest on carrying the NationalDebt.

If spending were balanced between thevarious programs and income, with a Na-tional Debt approaching $2 tril lion, it willdouble again in 8 years at an annual rate of8% in interest expense. Spending, there-fore, must be cut not merely moderately,but drastically to avoid this ominous situ-ation. But to do that, all the special inter-ests wil l cry foul. Everyone wants to cut theprograms which provide direct employ-ment such as defense while boosting thesocial benefits which create far less directemployment. If that continues, then theprivate sector must expand to accommo-date the increased unemployment causedby a curtailment in such direct employmentexpenditures.

It becomes a nasty cycle which continuesto move with a subtle momentum all of its

own. There is no stopping this cycle unlesseveryone realizes that it must come to anend. Otherwise, until the worst makes itselfknown, you wil l find few who are wil ling totake the drastic steps necessary to ward offthe impending outcome of another reverseleverage situation in world credit and debt.

The best and most accurate forecast whichI can offer for the next 4 year period is quitesimple. There will be no 1929 style defla-tion on the horizon before 1990. The nextfour years will be a period of extreme vola-tility of unprecedented proportions. Thelogic of our text books will give way as it hasmany times in the past. The very fiber ofthe marketplace will be torn and taxed to itsmaximum potential. The swings both upand down wil l become greater with eachpassing year. 100 point moves in the Dowwill become real daily events. The dollarmay fall lower but eventually it will r ise likea phoenix from the ashes left behind bythose who foolishly attempt to artificiallymanipulate themselves out of the reality oftheir transgressions.

In the end, the impossible will have notmerely become possible, but reality. Theonce stable years of recent vintage will belooked upon as the staging grounds beforethe storm. But through it all, opportunitywill knock upon our door and should it gounanswered we will look back and weep.The key to the future li es in understandingthe past. The debt crisis of the 1920s and1930s is quite similar to that of today. Howit influenced capital is a lesson which shouldnot be forgotten so easil y. It will serve uswell to remember what once was, couldagain someday be.


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