Echoes Of 1937 In The Current Economic Cycle

Tyler Durden's picture

Submitted by Brendan Brown via the Ludwig von Mises Institute,

It is not too early to ask how the present US business cycle expansion, already more than five years old, will end. The history of the last great US monetary experiment in “quantitative easing” (QE) from 1934-7 suggests that the end could be violent. Autumn 1937 featured one of the largest New York stock market crashes ever accompanied by the descent of the US economy into the notorious Roosevelt Recession. Should we take comfort from the fact that Friedman and Schwartz, in their epic monetary history, claim to have discovered the policy error by the Federal Reserve which was responsible for the 1937 denouement. And that today’s Fed officials are adamant about having learned their lesson? The short answer is no.

According to the now mainstream narrative, the strong economic recovery of 1935-6 could have continued for much longer if it had not been for the successive hikes in reserve requirements through late 1936 and early 1937, together with the sterilization of gold inflows from the start of that year. This meant the end of rapid growth in high-powered money supply. The trigger for these monetary policy changes was concerns within the Federal Reserve and White House about the intense speculative climate which had developed in equity and commodity markets during 1936, coupled with apparent upward pressure on goods prices. Friedman and Schwartz imply that these concerns were misplaced. And indeed, as regards the rise in goods prices, this was a benign recovery from a deep cyclical low-point in 1933 rather than something symptomatic of monetary inflation. It was, however, quite a different story for asset prices.

The monetary manipulations of the Roosevelt administration in combination with the Federal Reserve (dollar devaluation, monetization of subsequent huge gold inflows, interest rates pegged at zero throughout) had been fueled by 1936 serious asset price inflation most of all in the US equity and commodity markets. Today we recognize irrational exuberance as the salient feature of this monetary disease. Some combination of yield desperation and fears concerning an eruption of goods inflation in the far distant future lies behind the irrationality. The manipulating of long-term rates below neutral also encourages various feedback loops in which rising asset prices appear to justify otherwise wild speculation.

There is no simple empirical test which detects and measures speculative froth. We do not know the “underlying value” which would correspond to a sober rational weighing of all the risks. Traditional benchmarks of valuation such as normal price-earnings ratios are particularly misleading in a period such as the mid-late 1930s when the geo-political, domestic political, monetary, and economic climates are highly turbulent.

Asset price inflation would come to an end even without monetary action. It is sufficient that the real world outside becomes so much worse than what the irrationally exuberant investors have been seeing through rose colored spectacles (which filter out dangers and exaggerate expected returns) that the lenses splinter. In late summer 1937 that is what may well have happened. The rapid economic recovery of 1936 was evidently stalling by mid-1937. In July, Imperial Japan had launched its full-scale invasion of China. German rearmament accelerated following the military re-occupation of the Rhineland. In May 1937 the Supreme Court had ruled in favor of the Roosevelt administration’s trade union legislation. As markets crashed from August through autumn 1937, business confidence and investment plummeted.

The importance of monetary policy actions in late 1936 and early 1937 in contributing to this bad outcome is dubious. When market rates of interest are at zero, high-powered money lacks power, as banks are willing hoarders of large reserves well beyond normal levels (relative to their deposit base). Short-term rates hardly rose in response to the raising of reserve requirements through late 1936 and early 1937. Long-term Treasury bond yields climbed briefly in March 1937 by around 30 basis points to a peak of 2.75 percent before falling back, partly due to evidence of economic slowdown, and partly to a Fed bond-buying program as demanded by the Roosevelt administration. That political intervention surely signaled to contemporary investors that long-run inflation dangers were still live — a positive factor for continuing asset price inflation.

What are the parallels with the present? We have had some similarly ambiguous Federal Reserve policy actions. This time long-maturity T-bond yields have climbed more sharply from their low point (early 2013) but the announced curtailment of QE has so far been less striking. A more important parallel is the amount of irrational exuberance now evident in a range of asset classes (high-yield bonds, European periphery sovereign debts, real estate in various global hotspots, German equities, US financial and technology sector equities, private equity). A failure of the US economy to take off into a higher flight path beyond the winter stall and spring re-bound, disappointment regarding a German economic mini-miracle, a Chinese “hard landing,” geo-political storms, and a host of idiosyncratic factors which could setoff waves of profit-taking, are all possible triggers to asset price deflation and an early end to this cycle.


As we noted previously - it's never different this time...

While chart analogs provide optically pleasing (and often far too shockingly correct) indications of the human herd tendencies towards fear and greed, a glance through the headlines and reporting of prior periods can provide just as much of a concerning 'analog' as any chart. In this case, while a picture can paint a thousand words; a thousand words may also paint the biggest picture of all. It seems, socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well... from devaluations lifting stocks to inflationary side-effects of money flow and from short-covering, money-on-the-sidelines, Jobs, Europe, low-volume ramps, BTFD, and profit-taking, to brokers advising stocks for the long-run before a 40% decline.

Things look eerily similar eh?


But when we look at the headlines in the Wall Street Journal from mid 1936 to mid 1937 as the market topped out (orange oval), dipped, was bought back, then collapsed 40% in 3 months, nothing ever changes...


Government Bailouts Repaid - Bullish Implications...

N.Y. Central Has Repaid All Government Loans
The Wall Street Journal, 978 words
Dec 1, 1936
WASHINGTON Numerous railroad developments here yesterday were climaxed by the announcement of RFC Chairman Jesse H. Jones that New York Central had repaid all of its government loans, totaling $16,858,950, most of which was not due until 1941.

The Buying Is Not Speculation - Cash On The Sidelines...

It's Cash Bull Market With Little Inflation, Says Exchange Bulletin
The Wall Street Journal, 169 words
Dec 16, 1936
"This is eminently a cash market, and as such is relatively devoid of that major characteristic of speculative inflation, the use of borrowed money." says the December Bulletin of the N.Y. Stock Exchange.

Inflationary Side-Effects - Buy It All It's Going Up...

Wheat Prices Soar To 7-Year Highs On Heavy Buying Stimulated by Broad Advances in Foreign Pits
The Wall Street Journal, 1497 words
Dec 19, 1936
CHICAGO An avalanche of buying, encouraged by buoyancy in foreign markets, particularly in Winnipeg, swept wheat prices to the highest levels since December, 1929, Friday.


But... 3 days before...

The Wall Street Journal, 1027 words
Dec 16, 1936
As commodity prices continued to advance yesterday to the accompaniment of increasing public speculation in futures markets, signs of a feeling of caution appeared from widely separated centers.

As Goes The US So Goes The Rest Of The World...

London Trade Stimulated By Wall Street Strength; Averages at New Highs
The Wall Street Journal, 859 words
Nov 6, 1936
LONDON Overnight strength in Wall Street considerably stimulated the stock market yesterday. Dealers again arrived earlier than usual in anticipation of activity in international issues and found large buying orders in these stocks awaiting execution.

Global Economy To Lift Stocks...

London, New York Stock Transactions Largest in Months - British Brokers Stand in Queues to Fill Orders Activity Ascribed to World Efforts to Revive Trade
The Wall Street Journal, 956 words
Oct 8, 1936
Growing realization that the determined international effort now being made to sweep away trade barriers will be followed by improved business conditions throughout the world brought a rush of business to the security markets in New York and London yesterday such as not been seen for months.

Devaluation Always A Winner... (Market Prices Prove Economy Likes It)

Wall Street Weighs Devaluation Effects On U.S. Markets; Sees Little Likelihood of Dumping

 The Wall Street Journal, 1759 words
Sep 28, 1936
Rising security and commodity markets Saturday gave ample indication of the financial district's "bullish" interpretation of the U.S. Anglo-French monetary agreement.

Markets Cheerful Over Devaluation; Morgenthau Not Afraid of Dumping
Selective Buying Here and Abroad Motors and Other Shares Held To Benefit From Improved World Trade Are Strong Commodities Less Responsive International Markets
The Wall Street Journal, 1726 words
Sep 29, 1936
A note of cautious optimism was sounded by leading stock exchanges of the world which were open for business yesterday.

Equity Valuations Irrelevant...

Earnings Yield of 15 Stocks 4.8%, Compared with 9.4% Ten Years Ago
The Wall Street Journal, 1280 words
Aug 7, 1936
Industrial earning power is valued nearly twice as highly in the current stock market as it was ten years ago.

Europe Ever The Optimist Even In The Face Of Dismal Reality...

France Optimistic Despite Continuing European Tension - Growing Franco-English Cooperation Inspires Confidence
The Wall Street Journal, 652 words
Dec 5, 1936
Despite the unabated international tension and sudden menace of a constitutional crisis in Great Britain, the continuance of quarrels between Right and Left wings of the Popular Front, and the persistent antagonism between employers and labor, the general feeling in France is rather optimistic than pessimistic.

Short Covering As Ever...

Active Short Covering Sweeps Grain Prices To New High Levels - Chases Bears
The Wall Street Journal, 1345 words
Dec 2, 1936
New highs for the season were recorded in wheat, corn, rye and oats Tuesday. Spot red winter wheat advanced to the highest level since February, 1929. The sharp upturn, which boosted December corn almost 5 cents, and December wheat about 3 cents, was due principally to short covering by those made uneasy over the sale of an unusually large quantity of spot wheat out of local store, and by generous snowfall over the grain belt. Early in the session the market ruled easy on reports of rain and snow, and predictions for continued unsettled weather.

Government Spending Cuts Cause Concern...

Sabotaging Federal Economy
The Wall Street Journal, 412 words
Dec 5, 1936
Even the modest beginning which is attempted by WPA officials to reduce cost of government by cutting down the relief roles is encountering strong opposition. It is perhaps only natural that the workers themselves should object, although their methods of protesting through "sitdown" strikes, not to mention the violence which has manifested itself, may be open to question. But much more ...

States And Taxes...

Sales Tax Repeal May Unbalance Kentucky Finances
The Wall Street Journal, 1002 words
Jan 14, 1936
LOUISVILLE, Ky.--Repeal of Kentucky's 3% sales tax, effective the moment Governor Albert B. Chandler signs it, probably Wednesday will deprive the state of $3,500,000 of revenue budgeted to the expiration of the biennium ending June 30, 1936 and the counties of $1,750,000.

The Foreign Money Will Save Us...

Financial Centers Expect Greater Foreign Interest in Our Securities As Congress Delays Alien Tax Boost - Foreign Interest Here
The Wall Street Journal, 765 words
Aug 6, 1937
Some resumption of foreign interest...

Money On The Sidelines...

The Wall Street Journal, 590 words
Jul 1, 1937
While the Street remains in a cautious frame of mind, there are undoubtedly more possible buyers than sellers around, and it would not take a lot of encouragement to get these gentlemen aboard. Feeling in brokerage circles is that stocks are more likely to advance on any break in the unpleasant headlines these days than to decline far on a continuation of current uncertainties.

Jobs And Europe never far from fear...

The Wall Street Journal, 683 words
Jun 29, 1937
Certainly the market was more active on the downside, which surprised a lot of traders who had expected otherwise. The labor and foreign situations remain the main factors in the picture, and brokers feel that these have not changed one whit for the better thus far.

Buy The F##king Dip...

The Wall Street Journal, 508 words
Aug 24, 1937
A rather depressed feeling is extant in Wall Street as small volume and lower prices continue. Yet there are not many bears in the Street so far as the long pull is concerned. Traders still are stubborn in their theory that stocks are reactionary at the moment from lack of interest rather than any important liquidation. This is the period of the year when business takes a final breathing spell before the more active Fall and some think the stock market is doing likewise and that better days are ahead.

Rallies had Real Volume Then - No Low Volume Ramps...

The Wall Street Journal, 564 words
Aug 16, 1937
If Saturday's volume was any indication, revived interest in the stock market is here in the opinion of the Street. Furthermore the scope of trading Friday and Saturday indicated a broadening interest which included medium priced as well as low priced issues on contrast to the extended period wherein so-called "quality" stocks held sway in a limited market with small volume.

And At The Top... Brokers Suggest Stocks For The Long-Run (based on 'expectations')

The Wall Street Journal, 665 words
Aug 7, 1937
Profit taking for the week-end brought prices down in yesterday's market, but the undertone remained steady and brokers said there was nothing important in the character of the selling. Many houses were advising the purchase of favored issues on any further reactions. Metal shares ended the day with advances in many cases. There was impressive buying reported in the copper issues largely for long pull purposes.

The Wall Street Journal, 649 words
Aug 10, 1937
While volume left much to be desired, the expectation of stronger and more active markets continued to pervade Wall Street. Moreover, the general business picture is regarded as more pleasing than at any time since the so-called Summer "lull" came into force. Incidentally, the seasonal letdown thus far has not proved to be as extensive as many predicted and expected. Brokers say that many clients are away and that there are others who will be replacing their sold-out long positions in coming weeks.

See - it really is never different this time. It merely appears so since - as Kyle Bass so eloquently noted, the brevity of financial memory is about two years...


(h/t @ParagonCap)


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TeamDepends's picture

We have the bankers "jumping to their deaths" as well.

Vampyroteuthis infernalis's picture

It is called Liquidity Trap bitchez! Those who can get credit don't want it and those who need it can't get it. The Fed is powerless.

Obama_4_Dictator's picture

So true....I can get as many loans as I want......but I won't take any.....LOL

SamAdams's picture

It's not exactly the same this time.  In the 30's, the dollar had not been devalued to 4 cents, indicating the end is near.  In the 30's, the banks didn't have derivatives in excess of the worlds GDP.  In the 30's, they didn't keep FFR at near 0% 4 EVA.... 

This one may be the one we don't come back from.  At least not in a Federal Reserve Note currency, and that is likely the plan all along...

rosiescenario's picture

Absolutely is different this time, but the problem is the 'differences' are going to make the outcome far worse.


In the 30's we actually manufacured stuff here, we did not have anywhere near the size of our current bloated government, and the derivatives issue today is beyond interlinks all the banks worldwide, so when a bank such as DB has managed to create derivative exposure = 7X the GDP of Germany, you just have to wonder how many other banks will be sucked into that black hole? Visualizing that event is are the videos one can see of various mouse trap / ping pong ball displays.

mt paul's picture


life is good

with zero debt...

Pareto's picture

+1 Vampy: "The FED can change what things look like, but, the FED can never change what things are." (James Grant, Dec. 2013).  Available collateral, relative to short (levered) positions continues to diminish - after all, a house is still just that - a house.  The FED never learns that you can't get something for nothing.  They will fail miserably here as well as they continue to eviscerate the middle class and encourage real capital dislocation to unproductive uses.  And this attitude will never change despite the damage that will inevitably and necessarily occur as a result of price fixing the most comprehensive price signal - interest rates.  End the fucking FED!

NoLongerABagHolder's picture

Oh yay! Yet another data mining chart overlay from a time period that included a different monetary system making it look like we are on the precipice of a huge crash!

ZH has the patent on these. I think they have come true around zero out of 21 times in the past 5 years since the 2009 lows. Wasn't the last one a few months ago showing we were at the same point as 1987? That large swoosh crash was just around the corner then never seemed to come to fruition.

Wanna guess where this will end up?

OF course, as ZH likes to point out...... this time is surely different!


detached.amusement's picture

more like, one of these times, the shit show will falter.  if you want to base your analysis on fundamental things in a well manipulated market...welcome to not being in the club.  all these "non events" are is a postponement.  so in other words, this time is surely a rhyming verse.

El Vaquero's picture

History does not repeat, it rhymes. One of these times, the full force of reality is going to reassert itself.  What's different from today and 1937?  The level of manipulation is much greater today.  These motherfuckers are going to push and push until they push us right off of a cliff.  What remains to be discovered is where that cliff is and how far the drop is.

Fuh Querada's picture

right on, you can take any chart segment and superimpose it on any other to make any pre-dick-tion you want.

TheRedScourge's picture

"Bob over there has been spreading his conspiracy theory that that the sheepdog and the farmer are working together to shear us for at least 5 minutes now, and we still haven't seen any evidence of that. How much longer will it be before he admits he was wrong?"

Goldbugger's picture

Not enough, need to be some politicians also.

ebworthen's picture

I still believe we are on the cusp of 1932 not 1937.

And...we don't produce much and families don't live on farms anymore.


dontgoforit's picture

Quite a divergence in 2014 from the 1930's timeline.  Amazing what an unbridled Fed Reserve Bank can do.

dontgoforit's picture

Oh, and yes:  Audit the Fed!

By the way - extraordinary info trove in this, historically speaking.  It would be personally historical if I had the time to read it all, but I get the gist.

tommylicious's picture

Just like Billy Mumphrey's unbridled enthusiasm led to his downfall?

dontgoforit's picture

Probly...(don't have time for too much network TV).

McMolotov's picture

Let's just hope a massive world war can "save" us again.

LawsofPhysics's picture

There is now no other way to hide the fraud/theft, especially in this information age.

You don't expect these people (billderbergs, bankers, etc.) to indict themselves do you?

LawsofPhysics's picture

Well, some familes don't live on farms anymore, but yes, you get the idea.

Oh regional Indian's picture

Even though the current pace seems frenetic, the ships of states move slowly.

2016 looks like planned big one, unless something really chanes and fast.

Like an undeniable power breakthrough that shatters the oil cartel's hold on geo-politics.



Spastica Rex's picture

According to the chart, it's a few years yet to WWIII.

I find the graph fitting just a tad dubious, however.

edit: I'm speaking from an American perspective on war timing.

Oh regional Indian's picture

It looks more doo be doo be doo be us to me!


What's a year or three in such a cosmic drama, eh SR?

Spastica Rex's picture

Have you read Critical Path by Buckminster Fuller?

He wrote some really interesting stuff about the connections between fuel use transitions and wars.

Bucky was crazy, and brilliant at the same time, and not always correct, IMO. For example, I don't think humans evolved from dolphins (!). His was a western mind pretty unencumbered by western intellectual conventions. He has been a significant inspiration to me throughout my life.

Oh regional Indian's picture

I have studied the dymaxion and the geodesic dome deeply.

Would love  to build both.

His writing style is too abstruse. :-)

Squid Viscous's picture

this time is different, Mr. Yellen can just keep printing $ if needed

fonzannoon's picture

Thanks man that is interesting. The best part about that article, is how no one on there will talk about what was said and what is being planned...yet somehow these people are supposed to represent the interests of the people who elect them, and are kept in the dark. 

McMolotov's picture

You will be paid upon completion of the exercise on the last day of the event.*

*Unless you were deemed expendable. [Insert evil laugh]

Squid Viscous's picture

that is scary, any ZH'rs within 50 miles of atlanta might want to take notice...the big shit always coincides with a "training exercise"

dontgoforit's picture

Crap.  My kids, grandkids and we-the-grandparents live within 50 miles of ATL.  I've got to verify this via, FB, twitter or c-list.  There goes the holiday weekend.

dontgoforit's picture

Well, that post is legit on craigslist.  son of a gun.....100 bucks a day, hmmmmm.

Bear's picture

Boy, I am so glad I don't live near Atlanta ... I feel so safe here in Southern California, 34 hours and 2200 miles away fro the action

Squid Viscous's picture

interesting fonz - but what a collection of dipshits, menendez, collins, susan rice, etc... we're so fucked

Bear's picture

With Susan Rice and John Kerry ... I feel so safe

smacker's picture

Yeahbut...we all know that if something doesn't work and it's repeated time and time again and continues not to work, eventually it will work. This should be obvious to us mere plebs.

How do I know this? Because that is the reason why our highly paid, wise political leaders keep on repeating themselves, like radishes.



dontgoforit's picture

Every Christmas from 1956 to 1963 I just knew Santa was going to bring me that shiny new bike.....

Relentless101's picture

Man: Stocks are cheap!

Echo: Your an idiot!

q99x2's picture

Yep. Bernanke was a scholar of the 1930s depression. He got this one pretty damn close to identical.

Arrest him don't let him get away.

JustObserving's picture

Not to worry - if the stock market falters, Belgium will buy a trillion worth of US stocks.

Best to invest your money buying dinner for Bernanke at $250,000 a pop.

Atomizer's picture

I honestly think these assholes are scared shitlist. The 40 year old plan has sparked leaks in the sinking ship. Do we give a shit, nope.

dontgoforit's picture

Well, yeah, we do kind of give a shit.  If the mountain slides down we're all going to be covered in sh-iat.

Eyeroller's picture

And if a junkie keeps shooting up, he will die.  But that information means nothing to the junkie.

Sudden Debt's picture

I'm sorry but overlaying 2 charts without a scale that matches the 2, those charts become worthless.
A small 5 minute chart can also be projected on a 50 year chart and also show matches.

Fuh Querada's picture

do you want a match? this author's face and my ass.

Bear's picture

Can't you see by the chart (for 2014) that It Is Different This Time (IIDTT)

dbTX's picture

Yeah it's different this time allright, they have faster presses and more ink