Deja Vu All Over Again

The economy was booming.  Money was easy and the interest rates charged by the Federal Reserve were very low on a historic basis.   Brokerage firms and banks were lending money on margin to almost all comers regardless of credit quality.   The US was riding high with exports moving higher and industry growing and jobs plentiful.  

There was concern about sovereign debt.  A neighbor had defaulted on its bonds and no payments were being made.  That concerned the markets but buyers were still plentiful.   The US sent private bankers to the neighbor to negotiate terms of the repayment of the defaulted bonds.  The US government didn’t want to be seen publicly putting pressure on the neighbor because of diplomatic concerns.   Great Britain had abandoned the gold standard to ease its economic burdens from war debts.  Then it went back on the gold standard to demonstrate its leading role in international finance.  This of course constrained its ability to expand its burgeoning socialist agenda of that day and transfer payments to the Dole.  It and particularly France were counting on reparations payments from Germany to shore up their balance sheets. 

The German economy was in the doldrums due to revolutions, near revolutions and hyperinflation that destroyed savings and what little wealth was left after the War.   The terms of the reparations were renegotiated for slightly easier terms.  But even though payments were too much as everyone really knew and there was another default in only a couple of years.  

Meantime in the US foreign debt bond were a hot item for purchase even after the default of Mexico and other nations.    Then there was the explosion of common stock issues for all sorts of industries and enterprises.   There were calls and demands for some quarters to cool speculation in the market, some from the highest levels of government, including Herbert Hoover.   Some mergers were made and huge deals structured during this period.  GE acquired American Marconi which became a company you are more familiar with–RCA.  Also AT&T made a deal to protect its market with an up and coming competitor–ITT.  They agreed that ITT could build and operate systems overseas but not in the 48 States.  That deal lasted for over sixty years.  There was plenty of cash and liquidity.  That was considered a good thing and sign of wealth.  It might also have meant there was a dearth of really good investments with long term prospects.  All that liquidity meant it was easier for companies to raise money by issuing new stocks rather than borrowing money even though rates were relatively low.   All of this activity was reflected in the explosive growth of broker dealers from about 250 before WWI and over 6500 by 1929.  

The Federal Reserve finally raised the discount rate to 6% from 5% which many wanted to cool the economy which almost everyone thought was over heating. But it was too little and too late.   One notable financier got out of the market before the ’29 crash when he heard his shoe shine boy talking about what stock he was going to buy.   He knew that was not a good sign and he was right.  Of course there were those who believed things were just fine.  One noted academic in August of 1929 that the market had reached a permanently high plateau.   But it had reached the edge of a cliff.  When the Crash came the Federal Reserve poured money into the system buying government bonds and giving liquidity to Wall Street banks.  But, alas even with this pool of money and other efforts made by the major banking houses on Wall Street these efforts could not overcome one major problem.  There simply were no buyers.  Even if banks were willing to loan money for stock purchases there were no takers.  Yes, there were a couple of rallies but within a year or so the market had lost 90% of its value.

First they pumped money, then they tightened the money supply and deflation came along and reduced prosperity across the board.  The Smoot-Hawley Act that imposed high tariffs on imported goods to protect American jobs had exactly the opposite effect and cost jobs.

If you want to understand the headlines of today it would do you well to read some histories of the 1920’s.  There are many choices.  Discount rates of the Fed, inflation rates, deflation fears, easy money, lose lending standards, speculations and accusations of speculations, gold standard and foreign debt defaults were issues of that day just as they are now.  Then unemployment became the issue of the day.

For those who procrastinate too much–remember, don’t worry about the mules yet, just load the wagon.  My uncle.


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Filed under business, Economics, government

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