The First Great Depression: Blow By Blow, From The BIS, And How It Mirrors Our Ongoing Second Great Depression

Tyler Durden's picture

(This is a repost from a year ago. As the events over the past 12 months have progressed very much as the ongoing second great depression would have predicted, we republish this critical history lesson for all readers and remind everyone that history always rhymes. Pay particular attention to the fate of hard assets as the confidence in the entire system evaporated)

After surviving the start of the Second Great Depression, and living
in its first great bear market bounce/short squeeze, where now all the
attention is focused on a collapsing Europe, many could be wondering
how, if at all, it would have been different to have lived through the
first Great Depression. Luckily, courtesy of the recent release of the
BIS's full annual reports, history buffs can now replay, year by year,
the events in world capital markets from 1931 onward. We have put
particular emphasis on the dark days of the 1930s. Below we present the
first several such years as seen from the perspective of the BIS. Note
the endless similarities - in fact one could say the only difference
between then and now is the lack of "liquidity providing" algos (soon,
there will be an iPad app for that) to front run slow and stupid
retail/pension/mutual fund money. Pay particular attention to the role
of gold in the crisis period, the amusing reference to FDR's
confiscation of gold in 1933, and how the mood of insecured optimism
shifts to one of endless gloom, and ends, as everyone knows, with World
War 2.


year under review has been one of dramatic occurrences in the whole
field of international finance, credit, monetary stability and capital
movements, both public and private. The record of this year of
unparalleled world-wide disturbance reflects itself in the progress,
resources and activities of the Bank, which have been intimately
affected by each succeeding episode, in all of which the Bank was
promptly called upon to play a rôle, as was but natural for an
international institution the statutory object of which is "to promote
the cooperation of central banks and to provide additional facilities
for international financial operations, and to act as trustee or agent
in regard to international financial settlements", whose "operations for
its own account shall only be carried out in currencies which satisfy
the practical requirements of the gold or gold exchange standard".

the second month of the fiscal year, the collapse of the
Oesterreichische Credit-Anstalt, with its ramifications throughout
Central Europe, called for immediate aid to the National Bank of
Austria. In the third month of the fiscal year, there was announced the
so-called "Hoover moratorium", which materially changed the scope of the
operationsof the Bank and the magnitude of the funds at its disposal in
its capacity as Trustee for international financial settlements between
Governments. In the same month the banking difficulties in Germany,
precipitated by wholesale withdrawals of short-term credit, and the
pressure upon the Hungarian exchange, necessitated the organization of
central bank aid to the Reichsbank and to the National Bank of Hungary.

the fourth month of the fiscal year, the London International
Conference declared that "excessive withdrawals of capital from Germany"
had "created an acute financial crisis", and invited the Bank for
International Settlements to set up a Committee to inquire into the
credit needs of Germany.
In the fifth month, this Committee
urged "most earnestly upon all Governments concerned that they lose no
time in taking the necessary measures for bringing about such conditions
as will allow financial operations to bring to Germany — and thereby to
the world — sorely-needed assistance".

In the sixth month
of the fiscal year, the world was shocked by the sudden fall of
sterling, which was almost immediately followed by the suspension of the
gold or gold exchange standard by six other nations.
occurrences still further shattered what was left of confidence and
forthwith caused a strain on the reserves of nearly all central banks of
the world, including the Federal Reserve System. The necessity for the
employment by central banks of their reserves in turn placed a strain
upon the Bank for International Settlements, in its capacity as the
depositary for a substantial portion of the reserves of many European
banks of issue, but the large withdrawals in September were met without
decreasing its high degree of liquidity.

In the ninth month of the
fiscal year, there gathered at Basle the Special Advisory Committee,
convoked by the Bank because of the declaration of the German Government
that it had "come to the conclusion in good faith that Germany's
exchange and economic life may be seriously endangered by the transfer
in part or in full of the postponable part of the annuities". In the
succeeding months of the fiscal year the world financial system
continued to undergo heavier and heavier pressure and the condition of
Central and Eastern Europe and of its central banks, members of the Bank
for International Settlements, failed to ameliorate despite a series of
"standstill" agreements, currency restrictions, rationing of imports
and foreign devisen, and other artificial expedients.


the whole, 1932 may be styled a year of adaptation to changed
conditions prevailing in the economic and monetary situation and one of
some definite constructive effort. The most important constructive
measures were taken or initiated at two periods — the first in February
and the second in the last half of June and beginning of July. It was in
February that the Bank of England, after the repayment of more than
half of the large currency credits taken up in the previous summer,
lowered its discount rate from 6 to 5 per cent, and thereby gave the
signal to the downward movement of interest rates which was continued
all through the year in most parts of the world. In the same month the
German Government put into effect a plan for the thorough reorganisation
of the large German banks, which involved a considerable writing off of
assets and the supply of new capital with the aid of the Treasury and,
indirectly, of the Reichsbank. This reorganisation permitted the
re-opening of the German Stock Exchange, which had been closed for seven
months. In the United States the Glass-Steagall Bill was adopted on
February 27, giving greater freedom to the Federal Reserve Banks and
enabling them to alleviate the pressure exerted by internal currency
hoarding and withdrawals of gold.

On the basis of the provisions
of this new act, the Reserve Banks purchased Government securities in
the open market to an amount which in June reached $ 1,100 million, a
sum then sufficient not only to counterbalance withdrawals and hoarding,
but also to provide member banks with substantial excess reserves. At
about the same time two further events of outstanding importance took
place. The first was the conversion of more than & 2,000 million of
the public debt of Great Britain from a 5 per cent on to a 3% per cent
basis, which was announced in the second half of June and met with
immediate response; such a measure was welcomed not only because it
helped to alleviate the British budget, but also for the downward
influence which it exercised on long-term interest rates. Further, the
successful outcome of the Lausanne Conference in July, the value of
which it is hard to overestimate, revealed willingness by the Reparation
creditors — in the first place France — to make very large concessions
and it meant the elimination of one of the most serious political
hindrances to economic recovery.

These are outstanding measures.
But attention must not be concentrated on them alone. A close
examination of developments would show that the large volume of
international credits was further reduced, that strenuous efforts were
made in many branches of public and private economy to balance revenue
and expenditure, to establish equilibrium between costs and prices, to
render assets more liquid, to reach agreed arrangements for postponing
or scaling down debt payments, to overcome the difficulties resulting
from the liquidity crisis and to maintain control of the currency
position, even when foreign exchange restrictions were, in the interests
of trade, gradually relaxed. One  marked feature of the period was the unparalleled volume of gold movements.

the international movement of goods registered an unprecedented decline
in 1932, gold movements reached proportions never before experienced.

the year the total gold production of the world attained the high
figure of $ 495 million, or 2,559 million Swiss francs, thereby
establishing a new record by surpassing the production of the previous
peak year, 1915, by 139 million Swiss francs, and that of 1931 by 184
million. While it is to be expected that gold production should rise in a
period of sharply falling prices and plentiful labour supply, the
increase has exceeded even the most optimistic forecasts. It has been
most marked in the Union of South Africa and Canada, by far the largest
percentage increase occurring in the latter country. Production in the
United States, after having declined fairly steadily from 1915 to 1929,
has risen again and at a progressively greater rate during each of the
past three years.

the gold producing countries the influence of the new gold was
particularly helpful in Canada. Since the departure of sterling from the
gold standard, and the simultaneous depreciation of the Canadian
dollar, the gold production of the Dominion has been bought by the
Government at the prevailing market rate. The large production of 1932, $
63 million at par, gave to the producing companies approximately $ 70
million in Canadian currency, and greatly aided the Government in
meeting its maturing obligations punctually and in supporting the
exchange. In the Union of South Africa the production of gold made
possible the maintenance of the gold standard until the last weekof 1932
when, however, the large outflow of funds caused by speculation
depleted the reserves and forced the country to suspend the gold
standard. Under an agreement with the mines the South African Reserve
Bank had up to that time purchased the newly produced gold at par, which
enabled the Bank within a short space of time to recover the losses it
incurred through the depreciation of sterling and to reconstitute its
capital and reserves.

Whereas production has increased, the demand
for gold by the arts has fallen to a very low level and, even more
important, India and China, instead of absorbing a substantial part of
the newly-mined gold, have continued to export gold previously hoarded.
In the three months of October, November and December 1931, gold to the
value of nearly 500 million Swiss francs was exported from India; during
1932, Indian gold exports amounted to a little more than 1,000 million
Swiss francs, a sum not greatly inferior to the value of South African
production, which was 1,238 million Swiss francs. The great volume of
"new" gold which became available during 1932 from the mines and from
India had its effect not only upon those countries in which it
originated but also upon those to which it passed. The entire Canadian
production was exported directly to the United States, but that of South
Africa was, as usual, sold in London. In addition, almost 78 per cent
of the gold exported from India was sold in London (approximately 19 per
cent being shipped directly to the United Statesand about 3 per cent
disposed of in the Netherlands and France). The bulk of the South
African and Indian gold offered in London was sold against gold
currencies, usually dollars or francs, depending on whichever was the
stronger. In the case of the South African sales a large part, and in
the case of the Indian sales practically all, of the proceeds received
in these gold currencies was thereafter sold for sterling.

In the
following table an attempt has been made to indicate for each quarter of
1932 the amount of gold derived from production and from India and
China, the amount of gold used by the arts, as well as the increase or
decrease of gold in the reserves of Central Banks and Governments, in
order to obtain a rough estimate of the amounts hoarded and de-hoarded
in the different periods:

total increase in the monetary gold reserves of Central Banks and
Governments for 1932 was 3,125 million Swiss francs. This means that, in
spite of the hoarding which took place, monetary reserves received new
gold during the year in an amount 22 per cent greater than the total
gold production of the record year in the history of the world. And
although European Central Banks during the first half of 1932 converted
more than $ 700 million of their dollar holdings into gold, the gold
reserves of the United States were only $ 6 million smaller at the end
of the year than they had been at the beginning.
But in the first
quarter of 1933 the anxiety caused by the banking crisis led to a
reduction in American gold reserves, later, however, to be replenished as a result of a series of anti-hoarding measures. [read: executive order 6102]


twelve months have been striking ones in the financial history of the
modern world. They have witnessed the dramatic episodes in the United
States of America, culminating first in the abandonment of the gold
standard, with its worldwide economic and monetary repercussions, and
then, after a series of novel currency experiments, and a profound
change in the banking and central banking structure, in the devaluation
of the dollar and a qualified return to the standard abandoned. They
have witnessed the high hopes aroused on every continent by the
convocation of the London Monetary and Economic Conference, which was to
find joint solutions for financial ills and economic
and to prepare the way for a reconstituted international monetary system
— hopes which were dashed to the ground when this vast assembly met and
promptly discovered that it was either in disaccord on fundamentals
(especially as regards early currency stabilisation) or, if in agreement
on some fundamentals (for example on the economic side), in disharmony
as to the ways and means of reaching the agreed objectives. They
have witnessed, as a consequence, the formation, in the monetary field,
of the "gold bloc", determined to preserve the status quo in their
monetary system based on the classic gold standard, and in the financial
and economic field, a retreat from the direction of internationalism
toward a self-reliant, self-contained but ominous nationalism.
international financial and monetary relations the twelve months have
seen a series of retrograde developments — more moratoria, more 
transfer impediments, more artificial clearings, more gold hoarding than
during any year on record, more conversion of foreign balances and
their repatriation into the home currency, or in gold, by private and
central banks, an almost complete cessation of new long-term lending
abroad and a further limitation or reduction of the volume of short-term


four years will have passed since the financial crisis broke out, and
still the world suffers without relief from the unrest and the
uncertainties caused by moving currencies.
The consequent
difficulty encountered by the world's trade is reflected everywhere in
the large percentage of unemployment in those branches of national
industry which are largely producing for foreign demand. In many
countries, national endeavor has given an impetus to domestic affairs,
with visible results, but this whole stimulated development threatens to
become top-heavy as long as an expansionist policy at home is limited
by restrictive policies, internationally. The daily conduct of
every business and of every financial transaction which touches more
than one currency area is rendered difficult or impossible by the
varying exchange values of so many of the world's currencies,
particularly of some of the leading ones.
An indication of the
surprising extent of these inhibiting variations is contained in Chapter
II. Tariff changes, quotas, clearings, exchange restrictions,
compensation agreements and the like, all of which tend to throttle the
international exchange of goods, of services and of capital, are the
inevitable concomitants of the chaotic monetary conditions which
prevail. During the past twelve months, the disorder has become
intensified through, among other factors, the further fall, measured in
gold, of sterling and the currencies responsive thereto, the devaluation
of the belga, the silver policy of the United States, and the
continuous abnormal attraction of gold to the American market.


years have passed since in the course of 1929 the great depression
began which still holds large parts of the world in its grip. It
might have been expected that in the period which has elapsed the
depressive forces would have spent themselves and general prosperity
would have returned. But the depression of these seven lean years has
not been merely a slump of the pre-war order.
Its background
was different — it supervened upon an economic and financial situation
still suffering from the dislocation caused by a world war; and, with
the volume of world unemployment above 30 millions, it has grown into
something vaster than any pre-war depression. In the succession of
events it is possible to recognize four major disturbances:

Firstly, there was the ordinary downward trend of business. Conforming
to type, this was characterized by reduced sales, accumulation of
stocks and decline in output, particularly in branches such as the iron
and steel industries which produce capital goods or, in general, provide
industrial, agricultural, trade and transport equipment.

Secondly, there was a widespread fall in prices of primary products —both foodstuffs and industrial raw materials. This
put a particularly heavy strain on the balances of payments of a number
of overseas countries and, within a short time, effectively arrested
the flow of capital in their direction, whether in the form of loans or
of new investments.

Thirdly, in the late spring and summer of 1931 there came the banking crisis in Austria and Germany. Massive
withdrawals of funds were followed by a series of organized attempts to
stem the tide through the granting of emergency credits and, when these
attempts proved unsuccessful, by the introduction of moratoria,
transfer provisions and exchange restrictions, with the result that, not
only did foreign credits remaining in the countries affected become
frozen but ordinary trade was hampered by new and formidable fetters.

in the autumn of the same year there followed the depreciation of
sterling and of a number of other currencies. New elements of
uncertainty were thus added to the economic and financial situation and
strong downward pressure was exerted on prices quoted on a gold basis in
the world markets. A period of monetary changes had begun which within
two years was also to involve the United States dollar.


In the year which has passed since the last General Meeting great monetary changes have occurred. In
France, a new economic and financial policy was adopted in the spring
of 1936, and in the early autumn a decision was taken to readjust the
value of the French currency. Ori 25th September 1936 simultaneous
declarations were issued by the French, British and United States
Governments in which the three governments declared their intention to
continue to use appropriate available resources so as to avoid as far as
possible any disturbance of the basis of international exchange
resulting from the proposed readjustment.
During the same
week-end a decision was taken in Berne to change the value of the Swiss
franc and at The Hague an embargo was placed on the export of gold ;
shortly afterwards the Italian authorities readjusted the lira to a new
gold basis, while the Chechoslovakian crown was further devalued in
relation to gold and the Latvian currency was devalued  and attached to

The technical measures taken in the various countries
and the arrangements agreed upon by the different monetary authorities
will be referred to later in this report. Here it may be noted that the
changes in the values of thé currencies concerned were carried out with a
minimum of disturbance to the foreign commodity and capital markets and
that no setback was caused to the upward trend of world affairs.

heavy burden of debts both domestic and foreign was also in other ways
an obstacle to economic recovery, especially as the debt structure
inherited from the war was augmented by extensive international
borrowing in the 'twenties both on long and short-term account. In some
countries the main difficulties were caused by an excessive volume of
private indebtedness, e. g. mortgage debts of farming communities, in
other countries by internal government- indebtedness weighing heavily on
the budgets, and again in others mainly by foreign liabilities which
were a charge on balances of payments and "on monetary reserves.

progress has been made during the depression in scaling down the debt
structure. In addition to the effects of currency depreciations, the
burden of domestic debts has been alleviated by conversions, and foreign
indebtedness by repayments, repatriations and arrangements of different
kinds. The volume of international short-term indebtedness has thus
been brought down by about one-third in terms of sterling (a currency in
itself depreciated by almost 40 per cent.) and by still more in terms
of gold. Long-term indebtedness has not been reduced to the same extent,
but there has been a very important movement in the repatriation and
redemption of foreign securities, especially from the United States and
Great Britain.


It is not difficult to indicate the reasons why business last year passed through periods of great anxiety. In
the opening months of 1938 repercussions of the abrupt decline in
American industrial activity that had begun in the previousautumn were
felt all over the world, particularly in the export trade.

This decline proved the more depressing as it came at a time when there
were high hopes of more sustained prosperity in the United States. The
general weakness in prices of primary products, a consequence of reduced
American demand, and the downward tendency of many other prices called
for reductions in costs and other adjustments, which generally met with
resistance from interested parties. In countries of the sterling area,
which had experienced almost uninterrupted expansion since the autumn of
1932, conditions were ripe for a slackening of internal activity.

this situation were added exceptional events of a political character,
which dealt rude shocks to business and left in their wake a level of
armaments and military preparation never before witnessed in times of
peace. Among the most striking signs of the political
uncertainty was the pressure on sterling caused by mass movements of
funds which, with other factors, added $1,500 million to the American
gold stocks in the five months from August to December 1938.
harmful effects were found in the restraints suffered by ordinary
business, as initiative was cramped and the will to make new investment
weakened. Filling the gap by government orders for armaments and other
purposes for the time being helped to sustain employment but necessarily
diverted productive power from the pursuit of normal trade and
especially tended to impair the export capacity of the countries most
deeply involved.

Under the strain of almost uninterrupted
political tension, bringing with it general uncertainty as to the
business outlook, continuous capital flight from Europe and growing
armament expenditure in all countries, the economic development of the
world does not, however, show the picture of colourless gloom that one
would expect.
It lacks, of course, stability and nowhere
inspires confidence in the strength of the more favourable tendencies
that are at work. The state of the world is feverish rather than healthy; and whatever recovery may be seen is anything but steadfast, since it is  dependent on the use of stimulants on the one hand and interrupted by grave disturbances on the other.