a distant mirror
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A Distant Mirror: Credit contraction, monetary policyand commodity prices during the Great DepressionJohn KempReuters30 January 2009TRANSCRIPT
A Distant Mirror: Credit contraction, monetary policy and commodity prices during the Great Depression
John Kemp
Reuters
30 January 2009
MANUFACTURING OUTPUT AND CONSUMER PRICES 1920-1953INDEX JAN 1920 = 100
0
50
100
150
200
250
300
350
400
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Manufacturing Output Consumer Prices
CONSUMER AND WHOLESALE PRICES 1920-1953INDEX JAN 1920 = 100
0
25
50
75
100
125
150
175
200
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Consumer Prices Producer Prices
BORROWING BOOM IN 1920s …. FOLLOWED BY DE-LEVERAGIN G IN 1930s
0
50
100
150
200
250
300
350
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ bn
Private sector net debt of which, Corporate net debt
BEFORE THE CRASH, ROARING TWENTIES SAW HUGE RISE IN DEBT, EQUITY ISSUANCE
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Net issue of new securities (minus retirements)
RECORD MARGIN LOANS TO FUND EQUITY PURCHASES, DOUBL ING 1926-1928, ONE MANIFESTATION OF RAPID FINANCIAL INNOVATION AND INCREASED RISK APPETITE
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Brokers' loans to fund purchase of equities (1920-1938)
ONCE DOWNTURN UNDERWAY, BANKS RESPOND BY SHRINKING BALANCE SHEETSBANK ASSETS FALL 30 PERCENT 1930-1934
0
50,000
100,000
150,000
200,000
250,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Commercial bank assets in the United States
CONTRACTION HITS REGULAR COMMERCIAL LOANS HARDEST, BANKS SHIFT BALANCE SHEETS TO CASH AND MARKETABLE A SSETS
0
50,000
100,000
150,000
200,000
250,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Cash Investments Loans
VOLUME OF BANK LOANS SHRINKS 50 PERCENT BETWEEN 192 9 AND 1933
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Outstanding loans and advances by commercial banks in the United States
RESTRICTIVE CREDIT POLICY AND SLUMPING ECONOMY TRIGGER UNPRECEDENTED WAVE OF BANK FAILURES
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Number, U.S.$ mn
Number of banks suspended Volume of deposits in suspended institutions
DURING 1933, MORE THAN 8 PERCENT OF ALL BANK DEPOSI TS ARE "SUSPENDED" (ie FROZEN)
0
1
2
3
4
5
6
7
8
9
10
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Per cent
Deposit suspensions as percentage of total bank deposits
COLLAPSING CONFIDENCE IN THE BANKING SYSTEM DRIVES STRONG PREFERENCE FOR CASH RATHER THAN BANK DEPOSITS
0
10
20
30
40
50
60
1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940
U.S.$ bn
Currency held by public Bank deposits
DEMAND FOR LIQUIDITY BECOMES EXTREME, DEPOSITS SHRINK EVEN AS CASH DEMAND RISES
0
2
4
6
8
10
12
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Ratio of bank deposits to currency in circulation
MONEY SUPPLY CONTRACTS 20-25 PER CENT, INTENSIFYING DOWNWARD PRESSURE ON BUSINESS ACTIVITY AND PRICES
0
20
40
60
80
100
120
140
160
180
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
US$ bn
M1 (Currency + demand deposits) M2 (Currency + demand deposits + time deposits)
INTENSE DEMAND FOR SAFE, LIQUID INSTRUMENTS DRIVES SHORT-TERM TREASURY BILL RATES CLOSE TO ZERO
0
1
2
3
4
5
6
7
8
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Per cent
Yield on 3mth Treasury bills Commercial paper rates for 4-6 mth paper
PRONOUNCED UPWARD SLOPE IN YIELD CURVE, DEMAND FOR SAFETY AT FRONT-END, FEARS ABOUT DEFAULT & INFLATION KEEP BACK END UP
0
1
2
3
4
5
6
7
8
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Per cent yield
1Yr Aaa Corp Bonds 5Yr Aaa Corp Bonds 10Yr Corp Aaa Bonds
SHARP EASING IN NEARBY RATESONLY GRADUALLY REFLECTED IN BACK END
0
1
2
3
4
5
6
7
8
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Per cent
Commercial paper rates for 4-6 mth paper Yield on 10Yr Aaa-rated corp bonds
FED STANDS BY AS MONEY SUPPLY AND BANK CREDIT COLLA PSE, NO REAL INCREASE IN FED'S BALANCE SHEET BEFORE 1934 -1935
0
10,000
20,000
30,000
40,000
50,000
60,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Consolidated Balance Sheet of the Federal Reserve Banks
FED LENDING TO THE BANKING SYSTEM REMAINS STUBBORNL Y UNCHANGED 1929-33, CENTRAL BANK REFUSES TO BOOST MONEY SUPPLY THROUGH QUANTITATIVE EASING
0
5,000
10,000
15,000
20,000
25,000
30,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Federal Reserve Credit
LIQUIDITY PILES UP IN FEDERAL RESERVECOMMERCIAL BANKS INCREASE EXCESS RESERVE BALANCES R ATHER THAN RAISE LENDING
0
5,000
10,000
15,000
20,000
25,000
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
U.S.$ mn
Commercial bank reserves with the Federal Reserve System
CYCLICAL RECOVERY AND INTEREST RATES 1920-1953LHS MANUFACTURING INDEX JAN 1920 = 100, RHS INTERES T RATES PER CENT
0
50
100
150
200
250
300
350
400
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 19520
2
4
6
8
10
12
14
16
Manufacturing Output
FRBNY Discount Rate (RHS)
FRBNY advances to banks (RHS)
FRBNY other loans secured on US government obligations (RHS)
FED GIVES ABANDONS CONVENTIONAL POLICY AFTER 1934, SWITCH FROM DISCOUNT RATE (COST OF MONEY) TO RESERVE REQ'MENT (QTY OF CREDIT)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 195210.00
12.00
14.00
16.00
18.00
20.00
22.00
24.00
26.00
28.00
30.00
FRBNY Discount Rate
FRBNY advances to banks
FRBNY other loans secured on US government obligations
Reserve Requirements (RHS)
SHARE PRICES 1920-1953DOW JONES INDUSTRIAL AVERAGE JAN 1920 = 100
0
50
100
150
200
250
300
350
400
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 19520
2
4
6
8
10
12
14
16
Manufacturing Output Dow Jones Industrial Average FRBNY Discount Rate (RHS)
NO SUSTAINABLE RECOVERY IN FARM PRICES UNTIL SECOND WORLD WAR,BUT FARM PRICES HAD BEEN TRENDING LOWER SINCE END O F FIRST WAR
0
25
50
75
100
125
150
175
200
225
250
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Index Jan 1920 = 100
Winter wheat Cotton
ENERGY PRICES FALL, BUT RECOVERY UNDERWAY FROM 1934 AND PREVIOUS PRICE LEVEL MOSTLY REGAINED BY 1938
0
25
50
75
100
125
150
175
200
225
250
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Index Jan 1920 = 100
Coke Gasoline Crude oil
SHARP GAINS IN METAL PRICES DURING 1936-1937 (STEEL RISES 25 PER CENT IN 1937)FED RAISES RESERVE REQUIREMENTS AMID FEAR EXCESS LI QUIDITY IS DRIVING INFLATION
0
25
50
75
100
125
150
175
200
225
250
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Index Jan 1920 = 100
Steel (billet) Copper Lead Zinc
TIGHTENING OF RESERVE REQUIREMENTS IN 1937-1938 DRAINS $3 BILLION OF EXCESS RESERVES FROM SYSTEM, CONTRACTS CREDIT, AND TRIGGER S SECOND DOWNTURN
0
50
100
150
200
250
300
350
400
1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 195210
15
20
25
30
35
40
45
50
Manufacturing Output (LHS) Reserve Requirement (RHS)
Data is taken from the Census Bureau’s Statistical History of the United States (various editions)
Except:
Manufacturing output (Federal Reserve System)
Consumer and wholesale prices (Bureau of Labor Statistics)
Dow Jones Industrial Average (Dow Jones and Co)
