The Great Depression

Little known facts about the Great Depression

Call money interest rates (the interest rate charged when buying stocks) peak at around 20%. The Dow closes very close to its Sepptember 3rd 1929 high at 380.18.

-- March 26, 1929
The Federal Reserve bank of the U.S. raises its key interest rate, the discount rate, a full percentage point to 6% from 5% (where it had been since mid 1928).

-- August 8, 1929
“. . . Traders who would formerly have taken the precaution of reducing their commitments just in case a reaction should set in, now feel confident that they can ride out any storm which may develop. But more particularly, the repeated demonstrations which the market has given of its ability to “come back” with renewed strength after a reaction has engendered a spirit of indifference to all the old time warnings. As to whether this attitude may not sometime itself become a danger signal, Wall Street is not agreed.”

-- New York Times, September 1, 1929
The actual 1929 high of the Dow Jones average occurs at a level of 381.17.

-- September 3, 1929
Roger Babson, a popular economic foprcaster of the day, makes a bearish prediction. He won his nickname as "the Prophet of Loss" this day, and unjustly received some of the blame for the crash. The exact phrase he used was "riding to a fall".

-- September 3, 1929
The Bank of England raises its key interest rate, the discount rate, a full percentage point to 6.5% from 5.5% (where it had been since February 1929).

-- September 26, 1929
The Federal Reserve bank of the U.S. lowers its key interest rate, the discount rate, a full percentage point to 5% from 6%.

-- October 1929
Black Thursday, when the Dow fell from 305.85 to a low of 272.32, and closed at 299.47 (note that it had closed on October 10th at 352.86)

-- October 24, 1929
Brokers Believe Worst Is Over and Recommend Buying of Real Bargains
Wall Street in looking over the wreckage of the week, has come generally to the opinion that high grade investment issues can be bought now, without fear of a drastic decline. There is some difference of opinion as to whether not the correction must go further, but everyone realizes that the worst is over, and that there are bargains for those who are willing to buy conservatively and live through the immediate irregularity.

-- New York Herald Tribune, October 27, 1929
Black Tuesday, when the Dow fell from 252.38 to a low of 212.33, and closed at 240.07.

-- October 29, 1929
The Bank of England lowers its key interest rate, the discount rate, from 6.5% to 6%. It was at 5% by mid December.

-- October 30, 1929
After 1929
"Last Monday, all businessmen were shocked to read in their morning papers that the British pound sterling was no longer based on gold. The Tokyo Stock Exchange had announced that it would not open. Tokyo was followed by Bombay, Calcutta, Johannesburg, London, Berlin, Amsterdam, Copenhagen, Vienna, Oslo, Stockholm, Brussels and Athens. The Paris Bourse opened, but limited all trades to 5% of all holdings and no dealing in foreign exchange. Montreal’s Exchange opened similarly restricted. The New York Stock Exchange remained open, but as in dark November 1929, short selling was forbidden. In the artificial market thus created, stocks gyrated unsteadily, closed higher; bonds closed at lows for the year."

...
"So far during the Depression the Stock Exchange has moved against bears by the Questionnaire and the complete ban on shortsales which was imposed for two days when Great Britain suspended gold payments. The Questionnaire was used in the autumn of 1929 to learn the extent and personnel of the ‘bear party.’ President Richard Whitney (of NYSE) later revealed the short interest was at no time large during the days of great breaks. It was used again last May and members who were too aggressive in their tactics received sharp callings down. The Questionnaire in effect last week revealed every bear, whether he was short 10 shares or 10,000 for one hour or one month. It placed the Exchange in a position to act if it wished to, but did not deter ‘gentlemen’s agreement’ to refrain from taking short positions."

...
"In few nations nowadays is there a ‘free and open market.’ The Berlin Bourse closed from July 13 to September 3, opened with shortselling banned, then closed again. In Great Britain all trades were put on a cash basis which practically eliminated shortselling as did restrictions imposed on the French and Athenian Bourses. On the Paris Bourse a seller must deposit 40% margin, also 25% on the amount of the stock sold which makes bear activities a rich man’s privilege. One of the most dramatic events of the present crisis occurred in Amsterdam on September 21 when after a terrific slump in prices, all transactions were cancelled, the Exchange closed in status quo. Montreal and Toronto met the British crisis by banning shortsales and establishing ’minimum prices’ for securities, but both last week were open with no restrictions. The Tokyo Exchange has been closing and opening repeatedly during recent weeks. Tokyo stocks broke badly when the shares owned by interests who operate the Exchange collapsed.

(emphasis ours)
-- Time magazine, September 28, 1931 edition
"...Great Britain is a highly populated industrial country, carrying a terrific burden of internal debt, dependent predominantly for existence on foreign trade, enjoying the benefits of being the world's chief banking centre, possessed of a large net income from long-term investments abroad, but heavily indebted (in her role as world's banker) to other centres on short- term account."

-- Economist, September 26, 1931, p. 548
"The facts must be faced that the disappearance of the pound from the ranks of the world's stable currencies threatens to undermine the exchange stability of nearly every nation on earth; that even though London's prestige as an international centre may gradually recover from the blow which the sterling bill has received, banking liquidity throughout the world has been seriously impaired, much more so in other countries than this; that international trade must be temporarily paralysed so long as the future value of many currencies is open to grave uncertainty; and that, though the memory of the disastrous effects of post-war inflations should be a useful deterrent, there is an obvious risk lest we may have started an international competititon in devaluation of currencies motived [sic] by the hope of stimulating exports and leading to a tragic reversion to the chaotic conditions which existed five or six years ago."

-- "The End of an Epoch," London Economist, September 26, 1931, p. 547
The suspension also of the gold standard in Great Britain had three important results. Firstly, it gave a further shock to confidence. Secondly, it prevented foreign banks from drawing upon their sterling balances except at a heavy loss, and so drove them back on their dollar balances. Finally, it destroyed all faith in the safety and efficacy of the gold exchange standard, for foreign central banks found that the sterling exchange which they had legitimately held as part of their legal reserve had lost part of its value, thereby undermining their own stability, and inflicting upon them losses in many cases commensurate with their own capital."

-- London Economist, "America's Money Problems," October 10, 1931, p. 646
"It was inevitable that the suspension of gold payments in England should have a profound effect upon the position of leading central banks. Some who were engaged in operating the gold exchange standard were in possession of susstantial holdings of sterling as part of their legal reserve against their notes and other sight liabilities while others - such as the Banque de France - held equally large quanities of sterling, even though they were operating on the full gold standard. All these central banks have had to face a 20 per cent. depreciation of their holdings of sterling, which for many of them means a substantial proportion of their legal currency reserves.

"This situation has already had several far-reaching results. Many countries have summarily abandoned the gold exchange standard as a snare and a delusion, and their central banks have begun hurriedly to convert their devisen into gold. The general tendency has been to leave their sterling holdings intact, but to exchange their dollar balances and bills for gold; and this is a major cause of the recent efflux of gold from the United States. Again, commercial banks have not been immune from the consequences of the crisis, and have had to meet the suspicion and distrust of their customers. fostered by very numerous (if not individually very important) bank failures all over the world. They have had to face the immobilisation under the 'standstill' agreement of such part of their assets as they had ventured in Germany and central Europe; they have suffered, in common with the central banks, a 20 per cent. depreciation of their sterling holdings; and, last but not least, they have had to deal with the widespread dislocation to trade caused by the depreciation of sterling, which is the currency of world commerce. Thus commercial banks have, on the one hand, witnessed an outflow of notes into the hands of distrustful customers, and, on the other hand, they have had to mobilize their available assets, both at home and abroad, in preparation for further demands for currency."

-- "The Gold Rush," Economist, October 24, 1931, p. 746
"...in the United States, the position of the banks, though partly concealed from the public eye, may be in fact the weakest element in the whole situation. It is obvious that the present trend of events cannot go much further without something breaking. If nothing is done, it will be amongst the world's banks that the really critical breakages will occur."

"The Consequences to the Banks of the Collapse of Money Values", Lord Maynard Keynes, (Aug. 1931) in Essays in Persuasion, p. 177
"...the competitive disadvantage will be concentrated on those few countries which remain on the gold standard. On these will fall the curse of Midas. As a result of their unwillingness to exchange their exports except for gold their export trade will dry up and disappear until they no longer have either a favourable trade balance or foreign deposits to repatriate. This means in the main France and the United States. Their loss of export trade will be an inevitable, a predictable, outcome of their own action. [...] For the appreciation of French and American money in terms of the money of other countries makes it impossible for French and American exporters to sell their goods. [...] They have willed the destruction of their own export industries, and only they can take the steps necessary to restore them. The appreciation of their currencies must also gravely embarrass their banking systems.

-- "The End of the Gold Standard", Lord Maynard Keynes, (Sept. 27, 1931) in Essays in Perusasion, pp. 292-293
Countries leaving the Gold Standard, April 1929 - April 1933

1929
APRIL - URUGUAY
NOVEMBER - ARGENTINA
DECEMBER - BRAZIL

1930
MARCH - AUSTRALIA
APRIL - NEW ZEALAND
SEPTEMBER -VENEZUELA

1931
AUGUST - MEXICO
SEPTEMBER - UNITED KINGDOM, CANADA, INDIA, SWEDEN, DENMARK, NORWAY, EGYPT, IRISH ,FREE STATE BRITISH MALAYA, PALESTINE
OCTOBER - AUSTRIA ,PORTUGAL, FINLAND ,BOLIVIA, SALVADOR
DECEMBER - JAPAN

1932
JANUARY - COLOMBIA, NICARAGUA, COSTA RICA
APRIL - GREECE, CHILE
MAY - PERU
JUNE - ECUADOR ,SIAM
JULY - YUGOSLAVIA

1933
JANUARY - UNION OF SOUTH AFRICA
APRIL - HONDURAS, UNITED STATES

-- William Adams Brown, Jr., The International Gold Standard Reinterpreted, 1914-1934 (New York: National Bureau of Economic Research, 1940)
"The real crux of the Reserve system's position is that, while the ratio of the gold cover to its notes need be only 40 per cent., the remaining 60 per cent. of the notes must be covered either by gold or by eligible paper, and this last excludes Government securities bought in the open market, and in practice consists of rediscounted Treasury bills and also of acceptances and other credit instruments based upon trade. Now the depressed state of trade has reduced the Reserve Banks' holdings of assets of this last kind and has forced then en defaut de mieux to add enormously to their holdings of Government securities. The actual figure for the last-named was $728 millions last August, against only $150 million two years before, while during the same period 'eligible paper' had fallen from $1.141 to $316 millions. Add to this the actual and potential increase in the note circulation, and it is clear that this is the major factor in any calculation of the minimum gold requirements of the United States."

-- Economist, October 10, 1931, p. 647
"In 1928, there had been 491 US bank failures. In 1929, the figure had risen to 642. By 1930, as the collapse of the domestic real estate bubble began to take its toll, bank failures had risen to 1,345. In the wake of the British default, American "bank runs and failures increased spectacularly: 522 commercial banks with $471 million in deposits suspended during October 1931; 1,860 institutions with deposits of $1.45 billion closed between August 1931 and January 1, 1932. At the same time, holdings by the 19,000 banks still open dropped appreciably through hoarding and deterioration of their securities."

-- Susan Estabrook Kennedy, The Banking Crisis of 1933 (Lexington, Kentucky: University Press of Kentucky, 1973)
"People will endeavor to forecast the future and to make agreements according to their prophecy. Speculation of this kind by competent men is the self-adjustment of society to the probable...This court has upheld sales of stock for future delivery."

-- Justice Oliver Wendell Holmes, in a U.S. Supreme Court decision from 1905
"It was now evident why the European crisis had been so long delayed. They had kited bills to A in order to pay B and their internal deficits. I don’t know that I have ever received a worse shock. The haunting prospect of wholesale bank failures and the necessity of saying not a word to the American people as to the cause and the danger, lest I precipitate runs on our banks, left me little sleep. The situation was no longer one of helping foreign countries to the indirect benefit of everybody. It was now a question of saving ourselves."

-- Memoirs of Herbert Hoover, U.S. President 1928-1932, about the 1931 world financial crisis
"There have been in some localities foolish alarms over the stability of our credit structure and considerable withdrawals of currency. In consequence, bankers in many other parts of the country in fear of such unreasoning demands of depositors have deemed it necessary to place their assets in such liquid form as to enable them to meet drains and runs. To do this they sell securities and restrict credit. The sale of securities demoralizes their price and jeopardizes other banks. The restriction on credit has grown greatly in the past few weeks. There are a multitude of complaints that farmers cannot secure loans for their livestock feeding or to carry their commodities until the markets improve. There are a multitude of complaints of business men that they cannot secure the usual credit to carry their operations on a normal basis and must discharge labor. There are complaints of manufacturers who use agricultural and other raw materials that they cannot secure credits beyond day to day needs with which to to lay in their customary seasonal supplies. The effect of this is to thrust back on the back of the farmer the load of carrying the nation's stocks. The whole cumulative effect is today to decrease prices of commodities and securities and to spread the relations of the debtor and the creditor."

-- Memoirs of Herbert Hoover, October 5, 1931 , pg. 87
""Hoover again rose to the occasion, trying to arrive at some solution. Lending more money would not solve the problem. The vast, intricate entanglement of the foreign debt situation was a time bomb waiting to explode at any moment. Hoover’s proposal was to call a complete "standstill" among all banks everywhere, preventing anyone from calling upon German or Central European short-term obligations.

France still pressured for a $500 million loan to Germany. Hoover refused to go along with it. Mellon warned Hoover that if the U.S. did not go along with the plan the French intended to place all the blame on the United States, and he warned that he was playing into the hands of the French. Mellon strongly urged Hoover to accept the French proposal. Hoover lost his patience, as he put it, and informed Mellon that his "standstill" plan was being released to the press at that very moment. When the news came out, the London Conference was forced to accept Hoover’s proposal because the truth was at last coming out.

A group of New York bankers complained to the White House and warned that they would not comply with the standstill. They demanded that Hoover loan money to Germany so it could pay its debts which the bankers held. As Hoover wrote: "My nerves were perhaps overstrained when I replied that, if they (bankers) did not accept within twenty-four hours (his standstill proposal), I would expose their banking conduct to the American people." Needless to say, the bankers realized Hoover’s determination and his opinion that the taxpayer should not pay for the banker’s problems, which had been created by their eager solicitation of private citizens for foreign securities, and the bankers reluctantly backed off. Indeed, the actions of the banks and the Federal Reserve had bordered on the verge of treason as they acted as willing participants in what proved to be a game of musical chairs with the unsound foreign governmental debt instruments.

-- 1931, "The Greatest Bull Market In History", Martin Armstrong
"A company named Ultramares Corp. of London had lent Fred Stern & Co., Inc. of New York a fairly sizable amount of money based upon an independent audit prepared by the firm of Touche, Niven & Co. Fred Stern & Co. went into bankruptcy soon after the loan. Ultramares brought a suit against Touche charging negligence in preparing the audit. The first round produced a verdict that Touche was liable for an employee’s negligence. But later a Court of Appeals in Manhattan overturned the lower court’s decision. The court ruled that a financial statement which specifically figures as "true" would be guilty of negligence. But since the statement had concluded "in our opinion" no testament was intended. Hence accountants were relieved and adopted the phrases "we believe" and "in our opinion."

-- 1931, from "The Greatest Bull Market In History", Martin Armstrong
"The British... are suffering deeply from the shocks of the financial collapse on the Continent. Their abandonment of the gold standard & of payment of their external obligations has struck a blow at the foundations of the world economy. The procession of nations which followed Britain off the gold standard has left the US & France as the only major countries still holding to it without modification. The instability of currencies, the now almost world-wide restrictions on currency exchange, the rationing of imports to protect these currencies & the default of bad debts, have cut ever deeper into world trade."

-- Oct 6, 1931 - President Hoover in meeting at the White House with 32 members of Congress from both parties (link)
The market would have fallen much further during the summer of 1933 if it were not for new rules that the government imposed upon the various exchanges. Time magazine reported on the 7th of August:

"Banned from the pit forever were all dealings in indemnities (options on grain futures contracts generally regarded as pure gambling)." The markets were also "forbidden" to trade below the July low. Time magazine reported upon the effects of this measure on the 14th of August:

"The great exchanges of the U.S. last week lacked natural stimulants. On the Chicago Board of Trade the energy building grains, limited not only to 4 cent and 3 cent daily fluctuations, but also forbidden (by a rule good until August 15) to fall below their July 31 closing levels, floundered ineffectually...

From similar listlessness, begotten partly by regulation, Manhattan’s Stock Exchange was saved by the outside stimulants. Following pricking of the speculative bubble three weeks ago, the Senate’s busy Prosecutor Ferdinand Pecora called on Exchange President Whitney, told him speculation must be curbed. Last week the Exchange announced two new rules: 1) brokers must report weekly to the Exchange all that they know of the operations of pools and syndicates; 2) traders with debit balances of over $5,000 must maintain margins equal to 30% of the debit balance; those with debit balances less than $5,000 must maintain a margin equal to 50% of the debit balance. Calculated the ordinary way, the proportion of a trader’s equity to the total value of the stocks in his account, the margins now required to 23% and 33%. Example: if a man buys $1,500 worth of stock and gives his broker $500, he is said to have put up a 33% margin. However, his debit balance is $1.000, of which $500 is 50% adequate margin under the new Exchange rules."

The market interest declined considerably. Faced with limits, increased margins, but worst of all investigation if you happened to make money on the short side, the only safe way to play the markets was from the long side.

The Administration therefore intervened or simply forbid the market to trade below the July low. It was as simple as that. How could they do such a thing? Well as impossible or as outrageous as it might sound, that is what happened. Nonetheless, they did it and the market churned back and forth. The traders themselves withdrew from the market and liquidity shrunk. The rule was rescinded on August 15 but other measures were taken to support prices.

-- 1933, from "The Greatest Bull Market In History", Martin Armstrong
"SQUARE PEGS & ROUND PITS"

"Three weeks ago Chicago’s Board of Trade instigated by Washington, set a temporary level below which grain future prices would not be allowed to sink. Last week that artificial floor was removed. Prices which had been bobbing along on the rule like balloons wit hout lift ing power promptly dropped the maximum amounts permitted in one day’s trading. Great was the hullabaloo.

"Representative Jones of Texas and Senator Smith of South Carolina promptly swung inflationist thunderbolts about their head again. Letters and telegrams poured into Washington demanding that the Government re-peg prices.

"No such action was taken. Next morning the grain pits reopened and prices promptly dropped and bounced. They mounted rapidly and closed with substantial gains for the day. Thereafter they swung up and down, but neither sudden disaster nor abrupt boom followed.

"Contributory cause that certainly helped to steady the market was that, as the peg was removed, Secretary Wallace began to talk of the subsidizing of export of 50,000,000 bushels of wheat from the Pacific-Northwest, and of raising the wheat processing tax to pay for the subsidy. The Secretary of Agriculture has power to fix processing taxes at an amount equal to the difference between current prices and the average price 188 cents) for 1909-1914. The present tax of 30 cents a bushel represented that difference on June 15. For several weeks wheat prices have been about 88 cents but the tax continues. But the processing tax can be increased only if wheat prices fall below the June 15 level.

"The threat of subsidized exports may have been partly intended to support the market. It served also as a club over the conference of wheat producing nations which met again this week in London to try to agree on crop restriction. What one nation calls ‘subsidizing exports’ other nations call ‘dumping.’ He proposed, however, to dump wheat in the Orient thereby cutting into the exports of Canada and Australia to those markets.

"Not according to the Golden Rule was Secretary Wallace’s dumping threat for the U.S. Not only has a law against foreigners dumping in the U.S., but even when the Secretary made his announcement the Treasury Department was considering forbidding imports of steel from Germany, tennis shoes, electric light bulbs and calcium carbide from Japan, stearic acid and thumb tacks from Holland, rock salt from Canada, woven wire fencing, sulphide paper and binder twine from England, all on the grounds of dumping."

-- Time magazine, August 28, 1933 edition
"Because the world is round, what is right side up in the U.S. is upside down to China. Because of the geography of economics, gold miners like Chinese, are upside down compared to other men. Most businessmen worry about what price they will get for their product, but in normal times gold miners never worry, since an ounce of gold is (normally) the ‘makings’ of $20.67, the price they can get for their output never varies a penny. If other prices go up, other men are apt to profit, but for the gold miner that means only higher costs (no bigger income) and consequently smaller profits.

"Last March when Franklin Roosevelt ruled that money was not gold, he broke the old equation; $20.67 would no longer buy an ounce of gold. He cheapened the dollar to make prices go up to let businessmen profit. But he did not break the equation so far as gold miners were concerned. He would not let them sell their gold to anyone except the U.S. Government and the Government would pay only $20.67. Gold miners were out of luck - their costs mounted but the price of their product remained the same."

-- Time magazine, September 11, 1933 edition

This situation had become intolerable and grossly unfair to the gold mines. The costs were rising rapidly. The mere cost of living had jumped 9% since March of 1933. Therefore, Roosevelt decided to allow the gold mines to deliver their product to the Federal Reserve and the Fed would sell gold to foreign buyers at the world price. This tended to export inflation to other nations, such as France, that had remained on the gold standard. At the same time, this meant that gold was a commodity in that respect and the proceeds were then credited to the trade balance. The annual U.S. production was about 2.5 million ounces so this would add approximately $75 million to this economic statistic which previously had not been included.

However, along with that decision came a harsh rule as well. It had been estimated that $500 million in gold coin had not been returned to the government as the edict had demanded back in May. The Attorney General was then armed with another new law. Roosevelt could not declare it to be illegal outright to own gold since that would have been a flagrant violation of the Constitution.

So he took another approach which the courts ruled permissible. It was thereby ordered that all U.S. citizens file a report to declare how much gold they held. Failure to file the report carried a $10,000 fine or ten years in jail. So technically it was not illegal to hoard the gold, it was just illegal not to tell the Government that you were holding it. This was merely one example of the sumptuary laws which were being implemented through the clever tactics of switching a few words here and there to circumvent the true liberties which had been originally granted by the Constitution.

Although the free press in many cases was hard at work trying to protect the rights of the nation, it was a losing battle. Reprinted here is an advertisement which the New York Herald Tribune took out in the Wall Street Journal. This was one of eight advertisements in which the Tribune took upon itself to stand up and fight back. The headline "Time To Fight" was well taken.

The biggest crime perpetrated upon the nation was that the people voted for a man who had not revealed his true intentions of how his "New Deal" was going to achieve its goals.

-- 1933, from "The Greatest Bull Market In History", Martin Armstrong
"FLOWN DOLLARS"

"Dollars sank last week to the lowest level since the U.S. quit the gold standard, 63 cents. Because President Roosevelt had not yet seen fit to devalue the dollar, the price is determined by supply and demand in international exchange. And because the U.S. has a favorable trade balance, demand is normally greater than supply.

Whence the dollar flood has eaten away 35 cents of every 100 cents in each U.S. dollar since last April. Continental money-changers, canniest of whom are reputed to be ‘the Greeks,’ delight in selling dollars short, but bankers know that accounted for only a fraction of the drop. Last week from the British Commonwealth Relations Conference in Toronto came confirmation of what Wall Street has long suspected; that U.S. citizens have exported their dollars by the hundreds of millions.

"‘One of our problems,’ droned Viscount Cecil of Chelwood, chairman of Britain’s delegation, ‘is the flood of unwanted money that is pouring into our banks. These funds, deposited in the main by U.S. investors, are subject to withdrawal at 24- hour notice and are of little or no value, though it has not yet been discovered how to get rid of them.’

"Standard Statistics Co., Inc., world’s largest figure factory, estimated that $1,000,000,000 had flown the Atlantic, the bulk of it to London. France, whose tie to gold is none too secure, has received little, but Holland and Switzerland have been drowned in dollars. Unlike exports of gold which is strictly banned (for private citizens) the flight from the dollar has been quietly encouraged by Washington; it pushed down the price without requiring devaluation by Presidential decree."

-- Time magazine, September 25, 1933 edition
"U.S. STRIKES AT DOLLAR SHORTS"

"For the past two weeks there have been growing indications that the federal government is tightening its grip on the foreign exchange control or official intervention such as is practiced by the British Exchange Equalization Fund but the market is convinced, nevertheless, that hitherto uncontrolled fluctuations in dollars exchange.

"Thus far it has taken the form of a tightening of the control with regard to ‘swaps’ in the futures market. This is a blow aimed directly at the foreign speculator who has been maintaining an open short account in dollars in the belief that the American unit is headed for still lower levels in the world’s markets.

"Up until present, the foreign speculator, operating abroad has maintained his short position by ‘swapping’ contracts which are falling due for other contracts, say 90 days away. For example, if dollars had been sold for October 15 delivery, at the approach of that date October 15 would be bought and January 15 dollars sold against them. This produces a temporary demand for spot dollar exchange but the continued pressure on the forward market is depressing influences on the rate. The ‘swap’ really amounts to borrowing of dollars for speculative purposes.

"Permission is being granted to execute ‘swaps’ when it is shown that they are based on legitimate commercial needs. For example, if a shipment of goods has been delayed in delivery, it may be necessary to extend the exchange position until the goods are delivered and the exchange contract settled. No difficulty is experienced in obtaining permission for this type of transaction.

"The Continental exchange speculator, however, has no such basis for his transactions, which are financial rather than commercial, and permission for financial swaps is being refused. The effect of this procedure, it is believed in the foreign exchange market, will be to produce a growing outright demand for dollars as the short contracts mature, and which will not be offset by sales of futures. Commercial supply of dollar exchange is said to be very small."

-- Wall Street Journal, October 11, 1933

Here we find another example of what would today be unthinkable. The foreign exchange futures which are being referred to here are cash forwards. If you sell a January position you could find yourself with no means to legally buy back your position. So strange as it might sound, they drove speculators out of the short positions. Government just didn’t want any short bets against them in any market. They sought to have their cake along with a full belly and free rent all at the same time. If it couldn’t be achieved by a free market system, then they would make up their own rules and limit the freedoms of the market to their liking.

The last four months of 1933 were marked by numerous shocking issues. Many of the steps taken to force the markets to yield to the will of government are steps which will one day soon be reimplemented. Today we are all aware of the G-5 group of central banks and the political consensus around the world that promotes the manipulation of foreign exchange to achieve economic stability. The methods of the present are no different from those attempted by the central banks first in 1925, again in 1927 and finally by Roosevelt in 1933. In the September 25, 1933 edition of Time magazine, we find an interesting comment as to how the stock market was viewed to be a hedge against the currency inflation policies of Roosevelt. This is very important because I seriously doubt that anyone would view the stock market today as a hedge against inflation. Nevertheless, this issue was the primary factor which led the stock market into its rally which eventually peaked during 1937. Time magazine reported upon this aspect as follows:

"Methods of hedging against inflation within U.S. frontiers have become a favorite coffee-&-cognac topic. Purchase of industrial stocks is, of course, the most popular hedge, but commodities and land have been creeping up fast since the NRA threatened profits with higher labor costs. Some shrewd businessmen with little capital at stake argue that the best thing is to go as deep into debt as the banks (or friends) will allow; eventually they will pay off with cheaper dollars. Carl Snyder, economist for the Federal Reserve Board, was asked lately by a wealthy friend how he could hedge against all possible contingencies including deflation or stabilization so that he would die as rich as he was at that moment. ‘One way,’ snapped Economist Snyder, ‘is to shoot yourself.’"

The comment of economist Snyder in a very realistic sense was quite true. The only guarantee that one would die with essentially his current assets in this situation was to commit suicide for you never know what tomorrow would bring.

There is no doubt that during the year 1933, the stock market gained significantly on the prohibition issue which anticipated that the country would turn "wet" as of January 1, 1934. But the ent ire issue of Roosevelt’s currency inflation had a large impact upon the performance of the market as well.

The market began to rally finally from the summer of 1933 lows on the perception of a hedge against inflation. After a rally into January 1934, the market fell back and consolidated into a July low during 1934 once again. From there, commodity prices began to rally after the convertibility of gold for U.S. citizens had been officially abandoned in January 1934 and the effects of inflation began to spread throughout the world. Eventually, the inflation scenario continued to drive the markets higher into 1937.

From March 1933 into 1937, stocks rose largely upon the belief that inflation would raise the price levels of commodities and therefore earnings would rise as well. Stocks were also viewed as a hedge against inflation as we read in the September 25, 1933 edition of Time magazine. Therefore, we find some continuity in the analysis which took the position that stocks would rise in the shadow of commodities. This was largely created by the fact that much of the economy was heavily commodity oriented.

High techs were not exactly the rage of the times. Keep in mind that the automobile was viewed to be a large consumer of commodities. So we do find that there is some logic to the commodity relationship prior to World War II. But as the economy developed over the next several decades, the U.S. industrials and service oriented business sectors began to play a much more dominant role in the GNP of the United States. Thus, the concept of commodity relationships with the stock market has been divided and almost forgotten for the broad market as a whole.

After inflation spending continued yet commodities and stocks declined from the 1937 high, that scenario of currency inflation disappeared and Roosevelt’s theories appeared to be a total failure. If Keynes’ theory that government could increase spending to stimulate the economy was correct, then there should have never developed the depression of 1938-1940.

-- 1933, from "The Greatest Bull Market In History", Martin Armstrong
"In 1920 and 1921 the foreign governments and business were slow to realize that our era of taxpayers’ largess was over; but by 1922 they came to understand it, and the whole problem took another complexion. A boom began in foreign loans with the offer by foreign countries of extravagant interest to private lenders, from 5 to 8 per cent per annum.

"These loans soon began to raise disturbing questions as to their security, their reproductive character, and the methods of promotion. To serve any good purpose, such loans had to be adequately secured and should increase the productivity of the country of their destination. Out of such increases alone could they be repaid. Loans used for military purposes, for balancing budgets, and for nonproductive purposes generally would be disastrous."

-- Memoirs of Herbert Hoover, U.S. President 1928-1932
The Great Depression was not invented by the stock market. It was created by the forces of unsound international finance and sumptuary laws imposed upon the subjects of various nations both in the United States and in Europe. There is no doubt that the fate of the stock market in the future will be largely dictated by the swings in confidence within the international monetary system. ...

In conclusion, the fundamental explanations of the ups and downs of the stock market and the world economy cannot be simply drawn between an inference with interest rate actions or with corporate earnings. The impact of public confidence is by far the most profound influence in both the investment world as well as the world economy. Capital flowing back and forth between nations affords the closest relationship with the movement within the stock market and this perhaps can be most readily seen through the movement of foreign exchange markets as well. The issues are never purely domestic. No matter what market one may look at in whatever nation you may reside, the international influences will always be a subtle guiding force behind the more illuminated domestic issues of the day.

-- from "The Greatest Bull Market In History", Martin Armstrong

"The Greatest Bull Market In History"

PBS - The Great Crash of 1929.

Little known facts about the Great Depression

After 1929

"The Greatest Bull Market In History"