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The 1937 Recession
Submitted by Stephen Lewis of admisi
The 1937 Recession
The US Federal Reserve terminated its latest programme of bond purchases at the end of last month. Though Fed officials have been at pains to point out that this did not represent a tightening in monetary policy, but at most a halt in the supply of monetary stimulus, financial market participants are not wholly convinced. They fear the shift in Fed policy is occurring before US economic growth is firmly established. They worry that the US economy will slip back into recession from lack of adequate monetary support. Some of them cite the example of 1937-38 when the US suffered a severe downturn in business activity four years into its recovery from the Great Depression. This they attribute to an untimely tightening in the Fed’s policy-stance. They argue that Ms Yellen and her colleagues could be repeating the mistake of their predecessors eighty years ago.
Nowadays, events in the US economy in the 1930s are seen primarily through the prism of ‘A Monetary History of the United States, 1867-1960’ by Milton Friedman and Anna Schwartz. This is certainly a work that greatly influenced Mr Bernanke in his responses to the policy challenges he faced after 2008. The financial markets largely accept the Friedman/Schwartz view that the troubles of the Great Depression and its aftermath were the consequence of faulty monetary policies. However, we should remember that the Friedman/Schwartz work was not entirely objective; it was produced in support of their thesis that monetary variables are the key to short-term economic fluctuations. It is not surprising, then, that their account of the 1930s experience points to that conclusion. It attaches overwhelming weight to central bank monetary policy in generating and dampening these fluctuations, while overlooking what may be other significant influences. When, in 2008, the global economy plunged into a crisis widely acknowledged as the most dangerous since the 1930s, the Friedman/Schwartz analysis naturally gained influence, as a text relevant to such situations, and with that came the current assumption that central bank monetary policy sufficiently determines whether or not an economy will achieve sustained growth with stable prices. It also seems to many observers, especially in the financial markets where historical analyses are received second-hand, that central banks ought to be on guard to avoid repeating errors they are believed to have committed all those years ago. This is why there is now a strong focus on the Fed’s supposed contribution in precipitating the severe recession of 1937/38.
The setback to US economic activity in 1937-38 was no small matter. The unemployment rate rose from 14.3% to 19.0%, as manufacturing output suffered a peak-to-trough fall of 37% and personal incomes declined by 15%. By comparison, during the Great Depression in the USA, unemployment had risen from 3% to 21%, industrial production had dropped by 45% and personal incomes by 44%. (It is worth noting that the post-2008 downturn did not generate statistics anything like the order of magnitude of those relating to either of these episodes, except that labour-shedding was on roughly the same scale as in 1937-38). The monetarist analysis sees the 1937 downturn as a consequence of premature tightening in US central bank policy, starting in August 1936. In the previous year, the reserves held by banks had built up to more than twice the legal requirement, a circumstance that unsettled Marriner Eccles, then Fed Chairman. His concern and that of other Fed and US Treasury officials was that the reserves overhang could prove inflationary or result in asset bubbles, as it gave banks massive scope to step up their lending. Consequently, the Fed decided, over three stages, to double the level of the reserve requirements. This is the action that, according to the monetarist account, triggered the 1937-38 recession. To be sure, there was the appropriate temporal relationship between the Fed’s move and the economic downturn, with the former coming before the latter. However, while the data is scanty, it does not appear that the tightening of reserve requirements was the decisive factor, since the lending behaviour of member banks after the policy-move was similar to that of unaffected non-member banks. If higher reserve requirements had made a substantial difference to banks’ lending behaviour, member banks should have been more constrained than non-member banks. The monetarist account of these events is not all that persuasive.
We should bear in mind that the financial structure in the mid-1930s was, in important respects, different from today’s. One important difference lay in the relative importance of gold to the monetary system. The USA went off the gold standard in 1933 but under the Gold Reserve Act in January 1934, the Roosevelt Administration withdrew gold coin from circulation and fixed the US dollar price of gold at $35/oz. At that price, gold flooded into the USA from the increasingly troubled states of Europe, thereby increasing the US money supply. The rising liquidity in US capital markets boosted asset prices and encouraged speculative activity. As a result, there was widespread misallocation of capital. Belatedly, the US Treasury moved to sterilise the monetary effects of these inflows of gold. As the flow of liquidity to the markets was cut off, the unproductive character of much of the financial investment during the recovery years was made manifest. The economy thereupon peaked and went into a slide.
This Austrian School interpretation of events fits the facts rather better than the monetarist account. The lesson for policymakers today is uncomfortable. For, on this view, if there is a parallel with the 1930s, the damage has already been done. It was done when the Fed allowed funds available for investment in capital markets to balloon, not this time through unsterilized gold inflows but through its QE experiment.
There are, indeed, other factors that may have led to the 1937-38 recession. Contrary to popular belief, the Roosevelt fiscal policy up to 1937 was aimed at balance; only in response to the recession did the Administration resort to Keynesian pump-priming. Fiscal policy was far looser in the aftermath of the 2008 debacle than it was from 1933 onwards. This should warn us against assuming too close a parallel between the two periods.
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Bleeding out the ass to hugging the prez
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Our wheelbarrow is\ was made in China so.....
Kent Brantly walks into hospital.
Yeah. Eat this up you stupid fuckers.
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TPTB
Why no mention in the article about the Uptick Rule, a rule that went into effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. What a coincidence, the Uptick Rule is dumped in 2007 and shortsellers went on a rampage that helped crash the U.S. economy. The SEC passed the Uptick Rule after the U.S. economy crashed in 1937 thanks in large part to the activity of shortsellers on Wall Street. History repeats itself.
"What a coincidence, the Uptick Rule is dumped in 2007 and shortsellers went on a rampage that helped crash the U.S. economy."
There was no correlation. The uptick rule was in force in 2000, yet the Nasdaq tanked 76%. The Nasdaq fell a greater percentage under the uptick rule than it has at any time since the uptick rule was removed.
The DOW crashed a record 22% in one day in 1987, also with the up tick rule in force. The 1987 one day crash was the equivalent of the two day crash on Monday and Black Tuesday in 1929, when there was no up tick rule. The rule made no difference to the action of the market.
After 1987, the so called plunge protection team was created. It did not prevent a 76% crash of the Nasdaq, nor the 57% S&P dump in 2007-2009.
It is not legal short selling that drives a market down. China banned short selling and their market fell anyway.
In the 2010 flash crash, some stocks dropped to zero, not because of short sellers, but because there was no bid.
During the entire run up in the market, short sellers have helped drive the price up, despite no uptick rule, as they had to cover short positions. Shorting does not cause the market to drop. The market has gone up for over 5 years with people shorting it all along the way.
By the way, a brokerage will sell you a stock, then short it, if they know the price is going to go down. Why should it be that you lose money on the way down, when the brokerage is going to be making money on the way down?
Several years ago, 8 brokerages simultaneously recommended Google, going into double top resistance. The stock promptly dropped over 70 dollars in a month or so. The brokerages front ran whatever it was that drove the price down 70 dollars, as they had the inside information.
@ Milli V ,didnt you hear Obola sent troops to kill ebola! Where have you been?
"Fiscal policy was far looser in the aftermath of the 2008 debacle than it was from 1933 onwards. This should warn us against assuming too close a parallel between the two periods."
So it IS different this time? Who would've thought?
"So it IS different this time? Who would've thought?"
No, it is not really different this time. 2008 is more akin to 1927, when the FED loosened policy, leading into the 1929 debt bubble top. The bursting of the current debt bubble is still in the future. 1929 is ahead of us.
Who knows if it is different? 80 years later, experts are still trying to figure it out.
The author of this piece seems to think that the Friedman/Schwartz account of the Depression is the mainstream view in the US. I would politley take issue with him on this. The Peter Temin/Keynesian view is just as influential, on and off Wall Street. I have a lot of sympathy with the Austrian view of things, but he really cannot beg such an important premise.
Moreover, he would have to write a whole new article explaining the massive growth of total factor productivity during the Depression, the growth of housing starts from 1933 to 1939 and the increase in capital spending before 1937 and immediately after the '37 contraction. Would these things have happened in the wake of so much malinvestment?
In short, he is way over his skis here.
80 years from now, I'm guessing our grandchildren will still be trying to figure out what happened to us.
THEY OWN YOU!!!!! https://www.youtube.com/watch?v=rsL6mKxtOlQ
From the Molecules with Silly or Unusual Names website (page 4)
John Wolstenholme emailed me to say that he remembered a Professor at Oxford who once synthesised a Mo compound containing some olefinic and amine ligands, and (unsuccessfully) tried to get it named 'ene amine amyne a Mo'. And similarly, Matt Jandreau told me that one of his professors mentioned a new molecule (structure, right) in organic chemistry. He said "Old McDonald made this molecule... ene-yne-ene-yne-one".
http://www.chm.bris.ac.uk/sillymolecules/sillymols4.htm
I guess you had to be there
Lo and behold. If one digs deep enough in old government publications, data on the Fed's balance sheet can be found. We were amazed to see the large expansion of Total Assets beginning in August, 1930 at $4.716 billion and ending in December, 1948 at $50.043 billion. That was a 10.6X increase and encompassed both the depression and World War II. That makes the current expansion of 4.92X by the current Fed almost look small.
"We were amazed to see the large expansion of Total Assets beginning in August, 1930 at $4.716 billion and ending in December, 1948 at $50.043 billion. That was a 10.6X increase and encompassed both the depression and World War II."
But was the FED leveraged up 77 to 1, like they apparently are now?
Why talk about the 1937 recession when we are heading into the 1929 recession?
1937 was 8 years after the 1920's credit bubble burst. In 2014, we are still waiting for the current "1920's" credit bubble to burst.
It does not make sense to me that the FED is supposedly worried about repeating what they call the mistake of 1937, raising rates too soon.
Total U.S. debt is at least 59 trillion and still growing. 2008 was a credit dip, not a 1929-1932 burst credit bubble moment.
Stop looking to the wrong calendar year for current comparison to the 1930's.
Your comment was valid. We have not dealt with the 2008 credit bubble. Policies have made it worse.
Another issue was government was a much smaller part of the economy back then. The size of government today makes all this a much larger problem.
Major differences exist between the two periods. One is that today more people hold their wealth in intangibles and paper promises. Another is that debt is a much bigger factor in the lives of many people. Governments today tend to have more debt and "entitlements" weigh upon them.
If the economy was healthy and balanced we would not be experiencing slow growth while massive amounts of money are being printed and poured into the system. The crux of our problem remains in the fact that both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances.
Promises were made on the assumption that the advantages we enjoyed would continue in both Europe and the US. Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Debt does matter and the following article delves deeper into why kicking the can down the road will ultimately fail. Far to much faith has been put in our ability to manage these issues.
http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-debt.html
"Major differences exist between the two periods."
I agree with you that specific details are different. For one, last time around, the Florida land bubble was before the stock bubble. This time the stock bubble was first. Credit was something new in the 1920's, now it is taken for granted and one even has to have a credit history. Government was not in great debt in 1929, now it is.
Last time, the first recession, 1929-32 was worse. This time i contend the second recession will be worse, as they did things bass ackwards, pumping the debt bubble bigger after 2008, rather than letting it deflate, then reflating the system.
The problems with cheap money stimulus were warned about in 1930 by Austrian economist Dr. Benjamin Anderson Jr., right in the pages of the New York Times. The effects of withdrawl of the cheap money stimulus were refered to by Dr. Anderson as the "headaches which will follow." Excerpt:
"Cheap Money a Costly Panacea"
Dr. Anderson of Chemical Bank Says Remedy for Business Slump is Only Temporary; Boon to the Speculator; Interest Rate is Viewed as Just One Factor, Not Dominant in Circle of Trade.
SYRACUSE, N.Y., April 12, "Cheap Money is a stimulant, also an intoxicant," warned Dr. Benjamin M. Anderson Jr., economist of the Chase National Bank of New York City, in an address here tonight. "If the dose is large enough," he said,"a very substantial temporary effect can be brought about, but headaches will follow. It is not the sound way to do it."
After saying that cheap money was a costly and temporary panacea for business depression, Dr. Anderson said:"It is definitely undesirable that we should employ this costly method of buying temporary prosperity again. The world's business is not a moribund invalid that needs continuous galvanizing by an artificial stimulant."
The Federal Reserve System and the central banks of Europe are under heavy pressure from advocates of the cheap money panacea, Dr. Anderson said. The matter is exceedingly simple in the minds of its advocates, he added.
Cheap money will not induce manufacturers and merchants to increase their borrowings in an unsatisfactory business situation, Dr.Anderson declared. He cited the figures for commercial loans as reported by member banks of the Federal Reserve System in support of this contention.
But if merchants and manufacturers will not use cheap money, he said, speculators will. They will use cheap money in buying stocks, for the prospect of capital appreciation.
...
"In the second place, such methods are extremely costly in their effect upon the quality of bank credit. The ideal employment of bank credit is in financing the movements of goods, in financing short, self- liquidating commercial transactions. We have gone much too far in the substitution of bank investments in bonds, collateral loans against securities, bank holdings of real estate mortgages, and bank holdings of installment finance paper for the normal bank credit that represents goods in movement and that adjusts itself automatically to the volume of trade."
NY Times, April 13, 1930
http://select.nytimes.com/gst/abstract.html?res=F00812FA345D157A93C1A817...
If history is not repeating, it sure seems to be rhyming.
Over 3 million refugees have fled Syria, 10 million others displaced as new peace plan proposed
Redistribution of Hydrocarbons According to Henry Kissinger
Yes but the next part of the story is where little baby krugmans come from
"There are, indeed, other factors that may have led to the 1937-38 recession. Contrary to popular belief, the Roosevelt fiscal policy up to 1937 was aimed at balance; only in response to the recession did the Administration resort to Keynesian pump-priming. Fiscal policy was far looser in the aftermath of the 2008 debacle than it was from 1933 onwards. This should warn us against assuming too close a parallel between the two periods."
The parallel is still to the late 1920's, before the credit bubble burst.
it is interesting that even the austrians get the psychology of the market wrong. the market is like a surging crowd. if you have ever been in a crowd packed so tight you can barely move except with the momentum of the crowd you have an idea of how the market works. a concert with th e old open floors are a great example. just as the musician plays to the emotions of the crowd the market orchestrates the flow of investment.
the market is a lot easier because there are only two notes, greed and fear. in the early days of the market and economy(remember, 1937 was still the early days of a true national economy) there was a huge information void and hardly anything to speak of in term s of national communication and transportation network. no one had any idea how fast bad news travelled and how fast it would affct industrial output nor any of the counterparty risks involved. in other words, by the time the industries had time to react they were way too late with a huge overcapacity problem that took a severe toll on the economy when they over reacted to the fear of bankruptcy. greed on the way up(warped risk profile which made the 2008 crash easy to see coming) and fear on the way down(get out of my lifeboat). the trigger of the fear is the fear of incomplete information, fear of the dark. one of the main reasons the usa economy has only suffered relatively mild recessions since 1937 is because(they were all inventory recessions) the response became more sophisticated based upon more info on both the industry side and .gov and fed side, more info= less fear more greed.
greed pushed the banks to believe in the omniscience of monetary policy and industry has gotten fat at the public trough. it has reached some critical mass of sorts if you believe the crowd source predictor bots that measure sentiment as a predictor of future events. so where is the fear going to come from to tip this into the abyss of screaming fear and panic?
i don't see it. i see problems. i see a correction in march if the dollar remains strong through this quarter. the only glaring problem i see is the possibility of war. otherwise they have the financial stuff under control, by hook or by crook(think like a crook and you can make money). the people are under control even though someone else figured out how to burn a .gov building down. the war in the mid east hasn't raised any alarms nor the ukraine. what is going to happen to create enough fear to produce a run to something there is not enough of to satisfy everyone?
Extend your analogy to the musician now stopping the show, yelling ‘fire’ then mad-dashing from the stage grabbing whatever oxygen molecules one could grab in such a dash. The crowd hushes for a minute looks up and the roof is indeed on fire! 300 out of 15,000 successfully navigate the acquisitioning of oxygen molecules.
The elusive Black Swan is the ‘event’. Nobody knows in advance. Well, except for Jesus. He knows. But then prophecy negates free will so just buy an index fund.
"i don't see it. i see problems. i see a correction in march if the dollar remains strong through this quarter. the only glaring problem i see is the possibility of war. otherwise they have the financial stuff under control, by hook or by crook(think like a crook and you can make money)."
It is the illusion of under control. It is not under control when the Japanese central bank announces they are buying up every bond and then some. Such a move is not of control, but desperation.
A bigger housing bubble would not have saved the U.S. economy in 2008. Leveraging the FED to 77 to 1 is not going to either, or running the national debt to 18 trillion and beyond.
The laws of math do not change because of financial engineering.
We find ourselves in a complex philosophical debate over-influenced by emotion.
We can all agree the non-producers should be run through the wood chippers.
Jack Kevorkian proved non-producers willingly leap into the blades if given the chance. Why is that outlawed?
Yet, we all bitch about paying for them. Perhaps deep down we fear we can turn into them, so we keep them alive and hate on them.
That’s the real leverage problem. You know, one of us paying for 77 of them.
"You know, different, but the same". How many people as a percentage, were dependent on government (private and public) "cheese" during the 1920's and 1930's. Seems to me that we're in a much more precarious spot than we were in the 1930's.
There is actually a bigger, more essential problem with the entire system that is about to be corrected.
When the medium of exchange and the store of value are the same thing then the over printing of the medium of exchange will destroy savings.
Put another way: when the dollar (or current medium of exchange) is over printed (as fiat currencies always are) then the value of the dollar will fall. It certainly has since it was introduced in 1914.
The solution is to save in something other than the fiat currency being used as the medium of exchange. Gold works well for this. However, at the present, we have a paper gold currency. XAU is traded in very high volume on the Forex market and has forced gold to behave like a currency. Physical gold sales are all but irrelevant in pricing gold today.
Eventually the paper gold market will crash when no more physical is offered up for dollars. This will force gold into a physical only market and allow gold to rise in price. If gold is priced much higher it can then function as a reserve asset even at the central bank level.
The Euro seems to have been designed with these issues in mind. It holds gold as a reserve but it marks this gold to market prices. As the dollar sinks in value the price of gold will rise and the ECB balance sheet improves.
Today we have the ability to keep the price of gold low in the various paper markets. When this ends we will see the dollar price of gold rise and the ECB balance sheet with it.
This is hard to see now but many here already believe that the dollar will crash so it just takes a little more thought to get to the point where what I'm seeing appears obvious.
If you have your primary residence paid off, you don’t care if the system blows out. Look at life then as a vacation. Don’t stress.
Recall, George Bailey's mother rented rooms from her paid off house during the depression. She did well.
If you don't have, rapdily refocus.
A paid up mortgage is important. My grandpa paid off his home in 1965 and it hasn't had a mortgage on it since. My late mother was able to retire there before she died last week. Now it's my turn. Then, my kids. We're fortunate in this way, at least.
you are ahead of the rest but until property taxes are a thing of the past (oh , and the entity that can decide the "value" of your home at will and come with threat of violence to have you pay up) you don't really own anything.
But I hope it never gets to that place for you sir. And condolences for your mother.