The most astounding rubbish is spoken
every day by central bankers and other commentators who hold a monopoly on what
the public at large knows. Most of the New York Times column
(below) in 1929 fits today and is worth more refection than the next hundred speeches
by Federal Reserve Chairman Janet Yellen.
To fill in some
background to the Times article (many of these financial mutations have
parallels in 2014 - and growing more so by the day), bank customers, both
individuals and corporations, instructed the banks to lend their deposits to
the call loan market. It has been estimated that corporations (including U.S.
Steel, General Motors, AT&T, and Standard Oil of New Jersey) had lent $5
billion to New York Stock Exchange purchases by September 1929. These parties
were drawn to the call loan market as rates rose to 10%. In consequence, total
securities loans rose from $12.4 billion on October 3, 1928 to $16.9 billion a
year later. As a reference, GDP in the United States, not yet calculated but
estimated in retrospect, reached $99 billion in 1929.
One sentence in the Times
article below requires discussion: "Barring the Wall Street money
rates, everything seemed to be going well up to the middle of September."
This may have been true, but the call-loan market did warn of severe
distortions. This is always easy to say in retrospect.
Just a word on that.
Financial calamities usually happen in busy times. It's hard to know how much
weight to place on specific developments. There's a je ne c'est quoi in
the air, that, by its very nature, leaves people "bewildered," as the
New York Times proposes below.
The "call
money" distortions of today (see chart at bottom) terrifies some, but not
many. Of course, the Federal Reserve (in 2014) has confiscated interest rates,
which offer warnings and restrict the flow of lending into an overheated
market. This is one more reason central-banking policy is an attack upon
humanity.
New issues of
securities averaged $5.8 billion between 1924 and 1928; issuance was $11.6
billion in 1929, a record that stood until the 1960s. Common stock issuance in
1929 was 10 times the average volume of 1924-1928. More ominously, the new
issues in 1929 were dominated by investment trusts; these vehicles raised money
- not to produce anything - but to buy common stocks. To add to the fire,
investment trusts generally bought equity participation in companies on margin.
With practically no money down, it is no wonder that new issues of common
stocks in the month of September 1929 exceeded any previous year, except for
1928.
The New York Times,
December 30, 1929, "Financial Markets" column: "Financial
Markets: The Ending of a Remarkable Year - How it Appears in Retrospect":
The year that ends
tomorrow is regarded now, and will be considered in all future financial
reminiscence, with very much mingled feelings. Even the nation-wide speculating
public, which has taken its losses, and at least in outward semblance, learned
its lesson, will hardly end the year without a sense of bewilderment. Barring
the Wall Street money rates, everything seemed to be going well up to the
middle of September. Stocks should go higher when business prosperity increases
in a striking way, and trade activity, even in the usually dull midsummer
months, had reached a magnitude never witnessed in that season.
If prices for
industrial products were not rising, profits were. The predicted increase of
industrial company dividends had been realized. Few disturbing incidents had
occurred in company finance, to suggest that the upward trend of earnings and
dividends would not continue indefinitely. Yet this was the very moment
selected by fate for a crash in Stock Exchange values quite unprecedented in
history.
By people more
familiar with past financial history than the outside public of 1929 has shown
itself to be, it might be answered that it is precisely in such an hour of
seemingly impregnable prosperity that the worst of our older financial crises
have occurred. The disastrous deflation of 1920 began on the markets at a time
when consuming power was apparently inexhaustible, when visible evidence
appeared to be at hand that supplies were inadequate to meet demand. Long after
1907 it was angrily asserted that the October panic of that year could not have
been a reasonable occurrence, considering the immense activity of trade and the
very large company earnings which had prevailed in the preceding nine months.
The economic
explanation of the seeming paradox, however, assigns the great increase of
financial or industrial activity, just before the breakdown, as itself the
cause for the collapse. On every occasion of the kind, abnormal stringency in
the money market had warned, long before the 'panic month,' that credit was
overstrained. When, in the face of that condition, activities of general trade
or on the Stock Exchange were greatly increased and with them the demand for
credit, the breaking-point was reached
Such contributory
influences as withdrawal of foreign capital from Wall Street, last September
and in 1907, were merely incidents. On none of these occasions did either Wall
Street or the banks recognize at the time how extremely bad the situation had
already grown; the most energetic effort had been directed to concealing or
disguising its precarious nature. But the crash, when it came, was always
violent in proportion to the extent by which previous speculation had
over-stepped the mark.
In one respect the
history of 1929 resembles that of 1920. The two years differ, in that the
panicky collapse of nine years ago came in the immediate sequence to inflation
of commodity values, whereas last Autumn's breakdown followed inflation of
values only on the Stock Exchange. Otherwise the analogy is close. The
preceding speculation had on both occasions been built on the basis of pure
illusion; in each year the whole country seemed to be deluded into the notion
that a new economic era had arrived, in which all old-fashioned economic axioms
might be safely disregarded. In both 1929 and 1920 prices had been carried to
previously unimagined heights. In both, it was insisted up to the last (even by
serious businessmen), that they were destined to go vastly higher.
As a quite inevitable
result, the forced readjustment when it came was more sweepingly violent on
each occasion than financial imagination had considered possible. Last autumn's
50 percent decline in the average price of stocks surpassed all precedent; yet
the average fall of 43 percent in average prices of commodities, between the
middle of 1920 and the end of 1921, was almost equally unparalleled. If it
seemed, last August, that the price of General Electric, for instance, could
not conceivably fall 58 per cent in three months, so it was inconceivable in
May of 1920 that wheat would in the next 18 months fall 70 per cent, to less
than its pre-war average price. But the reckoning in both years measured with
inexorable accuracy the scope of previous excesses.
Source: dshort.com
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