DESCENT INTO THE DEPTHS (BEGINNING 1931):

The Great Depression Debate Begins

FUTURECASTS online magazine
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Vol. 3, No. 5, 5/1/01.

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Summaries of Great Depression Controversies and Facts

The Great Deception:

Great Depression Chronologies

I.
The Crash of  '29  

II.
Rebound from
Crash
of '29 (1930)

III.
Collapse of agriculture (1930)

V.
Collapse of international finance (1931)

VI.
Collapse of WW I financial obligations (1932)

VII.
Collapse of governments (1932-1933)

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

 The cold touch of reality:
  1931 opened with the usual estimates of approaching recovery based on such shallow analyses as the length of previous depressions (declining stages seldom longer than 18 months) and the "unsatisfied backlog of consumer and industrial needs" supposedly accumulated during the previous year of restricted purchases. On January 11, 1931, a N.Y. Times editorial oozed quiet confidence that the worst had occurred and had been sustained, with all weaknesses squeezed out and, therefore, slow but sure recovery must be imminent.
 ?

 All economic weaknesses may indeed have been squeezed out, but what of the weaknesses in political economic policy?

 

 

 

 

 

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   All economic weaknesses may indeed have been squeezed out, but what of the weaknesses in political economic policy? Concerning these, the N.Y. Times now began to give prominent exposure to those with a different message.
 ?
  Dr. Joseph Schumpeter blamed 90% of the Depression on the expansion of productive capacity of agriculture and industry due to Great War "abnormalities" such as payments of "non-commercial debts of a commercial character," the flight of capital from some countries, and comparatively high wages paid in some countries.
 ?
  Albert H. Wiggins, chairman of Chase National Bank, called for the U.S. to reduce war debt obligations. He stressed economic interdependence - the need to restore world trade as a pre-requisite for business recovery within the nation. He also called for more flexible prices and wages to speed the economic readjustments required for recovery.
 ?
  The role of WW I in causing the Great Depression and then preventing recovery was beginning to come into focus in the public press.
 ?
  The German Reichstag began its increasingly urgent pleas for substantial revision of Germany's reparations obligations.

 The spring, 1931, revival:
  The stock and domestic bond markets staged impressively steady rallies in anticipation of the revival that would come with the spring business season. (In those days before air conditioning and modern snow removal, the economy had a noticeable seasonal rhythm.) As the auto manufacturers began production of their new models, steel production climbed and business leaders, bankers and economists joined yet once again in the "confidence game." For once, the oft-burned and discredited politicians were generally mum.
 ?
     The stock market advance continued side by side with a continuing decline in brokers loans. However, there was so much unused money around that brokers were now increasingly able to finance margin accounts without borrowing from the banks for this purpose. The brokers loan statistics thus lost much of their value as an indicator of the extent of margin trading.
 ?
  $570 million in new bonds were floated in three weeks on this sea of optimism. A substantial gold outflow from England was stemmed in January. In February, Peru bonds fell sharply on news of a possible default. The price of silver continued to fall, hitting 25 3/4 cents per ounce on February 16, 1931. The N.Y. Times reported that, of 98 business lines listed for N.Y. City, NONE were doing better than in 1930, 29 were about equal with 1930 levels, and 69 were worse.
 ?
  A year of declining business was being increasingly reflected in declining dividends. Stock prices that had been at "investment" levels based on dividends supported by 1929 earnings were now shown to be too high based on reduced dividends from reduced 1930 earnings. (In those days before high marginal tax rates, dividends were a desirable form of return on investment.)
 ?

 The Big Board boomed another $5 billion in February, propelled solely by the optimistic hope for a spring business revival. This remarkable rally plunged ahead in spite of a flood of bad 1930 earnings and business reports.

   The Big Board picked up $3 billion in an impressive January rise to a total of $52 billion. Led by the wildly swinging Auburn Motor Co. - whose custom built automobiles were experiencing record sales - this upswing continued into February. The upswing culminated in impressive rallies on the 9th and 10th of February as many bears were driven to cover. Steel production moved up to 51% of capacity, and the U.S. Steel unfilled orders backlog showed an impressive three month gain. Bonds were strong and grain prices had substantial gains.
 ?
  The Big Board boomed ahead another $5 billion in February to a new total of $57 billion. This move was based solely on the optimistic hope for a spring business revival. This remarkable rally plunged ahead in spite of a flood of bad 1930 earnings reports. Business earnings, gross receipts, and foreign trade all down about 33% - prices down about 17 % - employment and payroll figures down sharply - business failures up sharply - and numerous other gloomy portents darkened the financial and trade outlook. However, steel production was improving.
 ?
  A N.Y. Times columnist noted towards the end of February that earnings had declined so precipitously in 1930 that this two month rally had boosted stock prices to levels where many stocks were now selling at higher price/earnings ratios than during the 1929 boom. Yields had improved solely because 1930 dividends had been paid from 1929 earnings.
 ?
  At the end of the rally, a substantial surge in brokers loans supported reports that a swarm of "amateur" speculators had rushed into the market to provide the final impetus to the optimistic bidding up of prices.
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  At the end of February, Congress passed a veterans' bonus loan bill over Pres. Hoover's veto. Vets borrowed $3 million in the first day of the new program, and would borrow about $1 billion in the first two months.
 ?

Over 50% of the industrial companies on the NYSE were buying their own stock. Even many business insiders still did not understand the nature of this Great Depression.

   In early March, $2 billion in U.S. Treasury issues of various types, offered at low interest rates, were quickly oversubscribed. $75 million N.Y. Central and $50 million Penn. RR. bonds were also quickly oversubscribed. There was clearly lots of money around looking for work even at low interest rates - just as long as the risk was minimal. (After all, with the general price decline at about 12% per year, even 3% interest meant a 15% real return on investment.) U.S. and high grade domestic bonds were hitting their highest levels since 1924, but secondary issues were in decline.
 ?
  Over 50% of the industrial companies on the NYSE were using excess cash to buy their own stock at low 1930 and 1931 prices. Some retired it and some kept it as treasury stock for future use in mergers or for other purposes. This reduction in the number of floating shares, similar in an opposite direction to the flood of new issues floated during the 1929 boom, makes the decline in share prices even more glaring. It also demonstrates that even many business insiders still did not understand the nature of this Great Depression.
 ?

 Commodity price averages continued their steady one to two percent per month decline.
   Bad news plagued the securities markets in March. U.S. Steel unfilled orders declined 167,000 tons in February. Over 100 companies - some of substantial size - completely skipped usual dividends in March alone. More than 100 others declared reduced dividends. The number of "extra" dividends usually announced in March was also drastically reduced. Industrials and railroads were the hardest hit.
 ?
  Utilities, banks and insurance companies were holding up well so far. There was a definite revival in textiles, made possible by over a year of pent up demand for clothes plus sharply lower prices made possible by the drastically lower costs of cotton and other fibers - and lower wages. Textile exports to nations with silver denominated currencies were aided by a partial recovery of the price of silver. Cotton goods were the only business line doing better than in 1930. Drug companies and amusement companies were the only other business sectors doing well.
 ?
  Steel production edged upwards to 57% of capacity. An order for 125,000 tons of steel for construction of Radio City in New York City went to U.S. Steel. This represented five to six thousand railroad car loads and employment for eight to ten thousand men. General Motors placed immediate orders for eight months supply of five basic commodities (copper, cotton, rubber, tin and zinc). Reports of reduced crop sizes aided agricultural commodity prices. Silver rebounded back over 30 cents per ounce.
 ?
  France had reentered the world financial market - supplying loans valued at tens of millions of dollars to Germany, Yugoslavia, Rumania, and Poland, with Greece and Italy next in line. German bonds recovered substantially. The stock market held its own until mid-March in spite of the dividend reductions.
 ?
  Nevertheless, commodity price averages continued their steady 1% to 2% per month decline. This made reparations, war debts and ordinary inter-governmental debts, as well as ordinary commercial fixed obligations, ever more burdensome.
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 Only if business revival was imminent could stock prices at and above 25 times earnings be sustained.
   In mid-March, N.Y. Central cut its dividend 25%, with future cuts a probability. Most other railroads followed suit. Favorable crop news hit those agricultural prices not supported by the Farm Board. Still, the stock market hemmed and hawed at price levels only slightly below its February 24, 1931 high. The market nervously awaited news of the expected spring business revival.
 ?
  This winter, 1931, upswing in stock prices - coming without any corresponding gain in trade or profits - had already pushed many stock prices to and above 25 times earnings. Only if business revival was imminent could such prices be sustained. Severe disillusionment awaited only a proper "trigger" such as the crash of copper and other commodity prices and reductions in steel production in the spring of 1930.

Spring, 1931 disillusionment:

   Once again, the federal Farm Board provided a trigger. The Farm Board already held 275 million bushels of wheat (about 1/3 of a good year's crop), bought at an average price of 92 cents, with a present loss of over $85 million and growing. Storage costs of 18 cents per bushel per year would cost almost $50 million. Original Farm Board financing of $500 million had been fully committed.
 ?

 Agricultural commodity price supports would end with the 1930 crop.

 

 

Stock market declines didn't assume severe proportions until steel production began to slip, providing irrefutable proof of further business decline. Steel was still the market bellwether.
   On March 22, 1931, the Farm Board warned that price support would end with the 1930 crop. There would be no support for contracts beyond May, 1931 delivery. Supported prices were over 25 cents above unsupported prices.
 ?
  In Texas, cotton farmers had shifted to wheat to take advantage of the Farm Board supported wheat prices. Wheat prices broke sharply as Midwest Congressmen howled their disapproval. July wheat (unsupported) hit 59 3/4 cents per bushel - the lowest price since 1895. Cotton declined sharply. Copper slipped below 10 cents per pound again.
 ?
  But steel production was reported steady at 57% of capacity, and the stock market wavered only slightly. Using 1916 as a base year, price deflation made the dollar worth $1.34. An excellent "return on investment" was being earned by those who simply kept their money in a mattress.
 ?
  On March 26, Anaconda cut its dividend rate 40%, with further cuts expected. New steel orders were reported irregular at the new high prices fixed by the industry. This finally was too much for the stock market to sustain, and it began to slip on a wide front.
 ?
  By the next day, the decline assumed the proportions of a general pullout of "spring revival" bull speculators. The decline continued on the next day during the short Saturday session as heavy selling orders from out of town hit the market. An unexpected dip in steel orders from auto manufacturers was reported and was expected to be reflected in the all-important steel production figures shortly.
 ?
  Exports for the first quarter of 1931 declined a staggering 33% below the low 1930 figure - about half due to declining prices and half due to declining volume. Construction remained depressed, with New York cement mills operating at just 37% of capacity. The 1931 "spring revival" was clearly not materializing as promised.
 ?
  Some commentators noted the completion of capital expansion plans initiated in 1929, making "percent of production" figures not strictly comparable. But nothing could disguise the drastic reductions in net profits and dividends. Due mostly to the drop in the last week, values on the NYSE lost $2.7 billion in March, to a new total of $53 1/3 billion.
 ?
  Such triggers as the drastic reduction in copper prices in the spring of 1930 and the Farm Board surrender in both the spring of 1930 and the spring of 1931, undoubtedly severely damaged investor confidence. They were highlights in the continuous and growing flows of bad economic news of all sorts, and they did stagger the markets.
 ?
  However, in neither case did stock market declines assume severe proportions until steel production began to slip, providing irrefutable proof of further business decline. Steel was still the market bellwether.

 As a result of the pegged prices (which had been discontinued), 1931 wheat and cotton crops were now expected to be very large.
   As steel production slipped to 55% and then to 53% of capacity, the stock market decline, led by the railroads, continued into April. The now familiar refrain was pushing ever further back into history for comparative price levels. Unsupported wheat, lowest since 1896; corn lowest since 1922; oats lowest since 1911. Exports and imports smallest since 1914 and 1915 respectively. As a result of the pegged prices (which had been discontinued), 1931 wheat and cotton crops were now expected to be very large.
 ?
  U.S. and high grade domestic bonds pushed strongly upwards. A $35 million N.Y. State issue was easily floated at less than 3 1/2 % interest. However, all other bonds were now falling. The number of South American bonds trading at below 50 had soared from 3 to 16 since the start of the year.
  ?
  After the initial sharp decline, the market continued slipping in extremely dull trading. People now spoke wistfully of a possible upturn in the autumn, but could offer no real sign of hope.
  ?

 The stock market decline was an unspectacular daily erosion of values in quiet trading, but with losses accumulating to a significant degree.
   John Maynard Keynes reportedly observed that the science of economics, banking and finance was in a backward state, and declared that those who represent themselves as "the experts talk much greater rubbish than an ordinary man can ever be capable of." He predicted two to five more years of slump.
 ?
  The newspapers were full of stories of relief efforts for the unemployed. Pynchon & Co. became the seventh Big Board firm to go under - the largest such failure in NYSE history. A smaller firm became the eighth failure - dragged under by ties to Pynchon. The stock market decline was now an unspectacular daily erosion of values in quiet trading, but with losses accumulating to a significant degree.
 ?

 As the spring business revival rallies clearly proved, confidence based on nothing leads eventually to disillusionment. It cannot indefinitely exist without some foundation in business and financial developments.
   On April 29, U.S. Steel announced first quarter earnings of just 5 cents per share. The price dropped 9 points in a single day, wiping out $79 million. The dividend was maintained again by drawing on earned surplus. U.S. Steel had dropped from a February, 1931 high of 152 3/8 to 115, and was still falling. One wag commented that, with earnings at just 5 cents per share, U.S. Steel was now trading at 600 times earnings.
 ?
   By the end of April, stock market values had pierced the Depression lows set in December, 1930. The Big Board loss in April totaled $4 3/4 billion to a new Great Depression low of just over $48.5 billion. Domestic and foreign bond averages were also hard hit. Only U.S. and high grade bond issues stayed strong.
 ?
  Many "experts" were still claiming that the Depression could be quickly ended if only "confidence" could be instilled. Based on what? As the spring business revival rallies clearly proved, confidence based on nothing leads eventually to disillusionment. It cannot indefinitely exist without some foundation in business and financial developments.
 ?

 

Wall Street was still inclined to be overoptimistic whenever there was even the slightest basis for hope of economic revival.

   The yields on the N.Y. Times 50 stock average - at current Great Depression low prices - rose almost to 7 1/2%. However, this reflected many stocks for which dividends were maintained by dipping into earned surplus and many for which dividend cuts were expected in the near future. By the end of April, the reduction of the Bethlehem Steel dividend from $6 to $4 per year brought yields of the 50 stock index back down below 6%, with more cuts expected.
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  If anything, Wall Street was still inclined to be overoptimistic whenever there was even the slightest basis for hope of economic revival. But disillusionment had come at last. Confidence game reassurances could no longer gain any traction, and the financial press began to fill with substantive attempts to explain the worsening Depression, and with policy recommendations for ending it.
 ?

 Only political action could reopen markets to international trade, and give world finance the "discharge in bankruptcy" that it now so desperately needed.

 

Political leaders and commentators around the world began to assail the tariffs that were strangling international trade.

 

The Republican politicians who controlled Washington preferred to point the finger of blame away from their policies. They emphasized the severity of the Treaty of Versailles (a valid point), but used this to deflect criticism away from the burdens imposed by U.S. tariffs and war loans.

    The American section of the International Chamber of Commerce summed up its views concerning the causes of the Great Depression.
 ?
  Citing the obvious economic interdependence of the United States and Europe, they placed the blame squarely on the after effects of the Great War. Undermining economic systems were;

  • economic dislocations from new alignments of industry during the war,
  • temporary surges of war-induced demand (as in agriculture),
  • changed political boundaries,
  • preparations for "the next round" of war that led to burdensome levels of arms procurement and the broad scale drive for self-sufficiency (the 1920s trade war),
  • financial dislocations arising from war debts and reparations obligations, and now,
  • the ever increasing tariff walls, quota restrictions, and other trade restraints - raised in vain attempts to alleviate the financial drains caused by the war debts.

  Thus, in spite of the economic shakeout of the inefficient, the outmoded, and the over extended in the private economy - and the many efforts at increased efficiency and financial retrenchment among the survivors - the fundamental causes of the Great Depression - being political in nature - remained to haunt world trade. Declining price levels and reduced trade volume continuously made the politically induced and maintained financial burdens ever more difficult to bear.
 ?
  Automatic market mechanisms could not "cure" these politically imposed and maintained weaknesses. Only political action could reopen markets to international trade, and give world finance the "discharge in bankruptcy" that it now so desperately needed.

 However, political leaders in the United States were incapable of such politically unpopular actions - and recovery would remain impossible until market forces became vicious enough to destroy governments and nations.

  These businessmen had finally officially recognized the evil, and the fight had been joined - 1 1/2 years after the '29 Crash and more than a decade after the Treaty of Versailles. Political leaders and commentators around the world began to assail the tariffs that were strangling international trade.
 ?
  However, newspaper commentators continued to ignore these arguments. Instead, they stayed with their ridiculous contention that the Great Depression was being caused by psychological factors - too much pessimism and loss of confidence.
 ?
  The leaders of the Republican Congress preferred to point the finger of blame away from their own policies. They emphasized the severity of the Treaty of Versailles (a valid point), but used this to deflect criticism away from the combined impact of U.S. tariffs and war loans. Many Democrats - responding to the same political pressures - supported these views. But FDR began to attack the tariffs.
 ?

Very light trading indicated that a drastic lack of buying interest, rather than desperate selling pressure, was dragging prices down.

  On May 7, 1931, the Federal Reserve Bank cut its discount rate to the all time record low of 1 1/2%. This caused a slight flurry in the securities markets, and then the decline resumed. After all, ALL business indices were DOWN.
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   Commodity prices were slipping steadily lower. Low interest rates stimulated nothing but savings accounts. These were still paying 4% to 4 1/2% interest, and constituted excellent "investments" under current conditions. However, since the banks were now getting less than this on government bonds and other high grade loans, this interest rate was expected to come down, too.
 ?
  High grade bonds were still strong, but the decline in stock prices continued. Very light trading indicated that a drastic lack of buying interest, rather than desperate selling pressure, was dragging prices down.
 ?
  Substantial cuts in dividends continued to hit the market each month. Almost $6 billion was lost on the Big Board in May, bringing total values to a new low of $42 1/2 billion. One of the worst monthly percentage losses of the Great Depression so far. U.S. Steel plummeted under 90. Railroads continued to decline sharply. London, Paris and Berlin markets followed the Wall Street break.
 ?
  The monthly decline in commodity price averages accelerated to almost 3% for the month of May. Dun reported a 25% cut in commodity price averages since their 1929 high, Bradstreet's commodity price average showed a 33% cut.
 ?
  Low interest rates were definitely not the answer to the problem.
 ?
  The yield average of the N.Y. Times 50 industrial stocks vacillated between 6 and 7 1/2% as stock price declines that pushed the average up alternated with dividend cuts that periodically pulled it down. Earnings had declined 30% in the last year, 61% since their 1929 high -- impressively close to the 55% decline in NYSE stock values. The large short interest had grown so big, and the floating supply of stock in brokers' hands had grown so small, that shorts had to pay substantial premiums to borrow 36 of the speculative leaders.
 ?

 The Federal Farm Bureau finally threw in the towel and withdrew all support for agricultural prices.
   By the end of May, 1931, July cotton hit 8.45 cents per pound. Copper had fallen to 8.5 cents with a four to six month supply on hand that was still growing rapidly in spite of production and price cuts. July wheat was at 58 3/8 cents per bushel, July corn at 55 1/8 cents with December corn down to 47 1/4 cents due to the forecast of a huge crop. September oats was at 26 7/8 cents, September rye was at 38 cents. Livestock prices tumbled to the lowest levels in 21 years.
 ?
  Railroad car loadings - which normally ran over one million per week - were 747,732 in the middle of May, bringing railroad activity to a Depression low. Steel production fell sharply to 42% of capacity. Desperate for business, the smaller mills were actively undercutting list prices.
 ?
  Figures for the first four months of 1931 showed exports off 47 1/2% (32.6% in volume) from the 1929 record pace. Imports were similarly down almost 50% in value (35.2% in volume). The foreign trade decline in this Depression was already much greater than in previous depressions.
 ?
  As June began, margin requirements were reduced from 25% to 20%. Nevertheless, trading began to dip under 1 million shares per day, as prices drifted lower in the dullest trading since 1926. The Federal Farm Board finally threw in the towel and withdrew all support for agricultural prices. But the damage had again already been done, as farmers had responded to Farm Board price supports by planting bumper crops.
 ?
  A new cyclical factor, caused by the Great Depression and a powerful causative of further decline in its own right, now began to make itself felt.

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  Copyright 2001 Dan Blatt