Rank: Member Joined: 11/13/2006 Posts: 551 Location: Nairobi
|
karanjakinuthia wrote:Dear Friends,
No two eras are created equal. Nevertheless, man’s reaction to socio-economic events is almost always identical. Booms are heralded as new paradigms in society whilst busts imbue fear and depression. I have unpacked the 1931 Currency Crisis with a view of providing historical markers to the unfolding European Debt Crisis.
The chronology below covers the years and events prior to and leading up to the 1931 Currency Crisis. It shall be disseminated in two parts:
1919
The peaking of the commodity bull market that had begun in 1907. The Dow Jones hits an all time high of 120.
1920
The Dow Jones Index bottoms at 64 points.
1922
Britain chooses to increase taxes and reduce money supply to combat recession whilst Germany grapples with war repatriations imposed on it by the Allies after World War I.
President Harding expresses concern over the number of foreign bond issues in the United States.
1923
Germany defaults on its war repatriations. Adolf Hitler is jailed for 5 years after his uprising fails.
The infamous Weimar hyperinflation rages as confidence in the Papiermark collapses.
1924
Germany issues the new Reichmark, backed by gold and real estate to replace the Rentenmark. The latter replaces the Papiermark as an intermediate currency to restore confidence.
European nations ravaged by inflation return to the gold standard. France adopts a gold Franc, Austria – a silver based Schilling, Germany – a gold Retenmark and Russia - a gold based Chervonetz.
U.S. gold reserves are at the highest level in history, nearly 50% of the world’s official reserves.
Britain and France advocate for forgiveness of war debts worth $11 billion by the United States. They succeed in obtaining partial forgiveness
The Exports Plan is formulated to rebuild Europe. Its member economies recover leading to an attraction of investment.
1925
Britain returns to the gold standard.
1926
The U.S. emerges as the money centre of the world, hosting bonds from 65 nations. Europe has majority, Central and South America rank in second. The defaults of 1931 wreck the debt issued from these two regions.
1927
Europe appeals to the United States to lower interest rates in order for capital to flow to its borders, easing its ability to service war debts.
1928
Stock markets in Britain, Germany, Belgium and Switzerland hit their peak.
1929
Herbert Hoover takes over as President of the United States.
The Dow Jones Index closes at an all time high of 380. A bear market then ensues that is remembered throughout history.
Herbert Hoover institutes tax cuts, a public building program and easy credit from the Federal Reserve to shore up the economy. In addition, he obtains commitments from industry not to cut wages.
1930
Companies begin to show declines in earnings.
Unemployment in South America spawns political upheaval.
The Smooth-Hawley Tariff Act is enacted in the U.S., sparking a trade war around the world. A direct result is exacerbating the inability of foreign nations to pay off debt.
Banking failures in the Midwest States pick up pace as a result of declining commodity values and real-estate backed loans.
At the onset of August, the Midwest and Southern States are plagued by a severe drought. The tribulations there are captured in John Steinbeck’s classic “The Grapes of Wrath”.
Whilst the stock markets tumbles, President Cleveland, in a speech to the United States Congress, delivers the words:
"At times like the present, when the evils of unsound finance threaten us, the speculator may anticipate a harvest gathered from the misfortune of others, the capitalist may protect himself by hoarding or may even find profit in the fluctuations of values; but the wage earner - the first to be injured by a depreciated currency - is practically defenseless. He relies for work upon the ventures of confident and contented capital. This failing him, his condition is without alleviation, for he can neither prey on the misfortunes of others nor hoard his labor."
1931 (Currency Crisis)
Distress in the bond market begins with the default of a Detroit municipal bond.
Hoarding of gold and speculation in gold mining shares becomes prevalent.
Germany and Austria formulate a customs agreement to ramp up trade between the two debt ridden nations. France, economic cornerstone of Europe, vehemently opposes the move calling it a violation of The Versailles Treaty. Britain joins the protestations.
The French turn the screws on Germany and Austria by redeeming short term debt bills.
Credit – Ansait Bank of Austria collapses causing severe distress in the banking sector. The National Bank of Austria runs out of foreign exchange prompting the nation to appeal to France, Britain and the United States.
No monies are forthcoming from France as it wants a repeal of the German – Austrian customs agreement. Britain is more accommodating, advancing Austria with 4.5 million Pounds.
This move vexes the French who begin liquidation of their Sterling holdings.
The Federal Reserve cuts interest rated to repel capital that seeks safe harbor in the United States. Conversely, Central European nations hike interest rates to attract capital. Both actions fail to stem the tide.
German banks come under siege following statements by the German Finance Minister that the Austrian banking crisis would hit its institutions.
President Hoover proposes a debt moratorium for Germany to which 15 governments with the exception of France agree to. Only upon the threat of isolation do the French co-operate.
The Banking Crisis continues unabated in Europe leading to closures in Hungary, Germany, Austria and Eastern Europe.
President Hoover declares a debt freeze on short-term German liabilities.
Uncertainty hovers over Britain as the French begin withdrawing gold out of British banks. Other nations follow France’s actions causing distress for Austria, Germany and Eastern Europe. The Bank of England attempts to stem the flow by increasing interest rates but to no effect. Furthermore, the BOE requests a $650 million loan from U.S. banks. Lastly, the government adopts austerity measures to curtail public expenditure.
A month later, Britain abandons the gold standard, by and large defaulting on its foreign debt. These actions by Britain along with the Debt Crisis in Europe and South America cement the depression.
The German Bourse closes from June 13th to September 3rd while the Amsterdam market cancels all trades that took place on September 21st after a horrendous plunge.
Next in line to face a crisis of confidence is the United States. Rumours of an abandonment of the gold standard results in withdrawal of bullion from the Federal Reserve and banks. A hike in interest rates by the Federal Reserve does not instill confidence in the markets.
Trade volumes declined sharply. Merchants were unable to effectively price their goods due to extreme currency volatility.
1932
A hearing by the Senate Finance Committee obtains information regarding the extent of the debt crisis. All 57 issues that default are from South American governments.
Bank failures continue in earnest prompting gold hoarding.
Chile and Greece abandon the gold standard, unsettling an already fragile forex market.
Jitters over rising deficits in the U.S. cause France and other European countries to withdraw gold from the New York Federal Reserve.
Seven nations meet in Switzerland to agree on reduction of German repatriation payments from $64 billion to $712 million.
The lowest close in the Dow Jones is achieved on 8th July, 1932 at 4112, a 89% decline from 1929.
Thank you for listening.
Sources:
The Greatest Bull Market in History by Martin Armstrong
http://www.wikipedia.com
|