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 1920-1953 INDEX JAN 1920 = 100
400
350
300
250
200
150
100
50
0 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 1920-1953 INDEX JAN 1920 = 100
200
175
150
125
100
75
50
25
0 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-LEVERAGING IN 1930s U.S.$ bn 350
300
250
200
150
100
50
0 1920
1922
1924
1926
1928
1930
1932
1934
Private sector net debt
1936
1938
1940
1942
of which, Corporate net debt
1944
1946
1948
1950
1952
BEFORE THE CRASH, ROARING TWENTIES SAW HUGE RISE IN DEBT, EQUITY ISSUANCE U.S.$ mn 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
Net issue of new securities (minus retirements)
1944
1946
1948
1950
1952
RECORD MARGIN LOANS TO FUND EQUITY PURCHASES, DOUBLING 1926-1928, ONE MANIFESTATION OF RAPID FINANCIAL INNOVATION AND INCREASED RISK APPETITE
U.S.$ mn 7,000
6,000
5,000
4,000
3,000
2,000
1,000
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
Brokers' loans to fund purchase of equities (1920-1938)
1944
1946
1948
1950
1952
ONCE DOWNTURN UNDERWAY, BANKS RESPOND BY SHRINKING BALANCE SHEETS BANK ASSETS FALL 30 PERCENT 1930-1934
U.S.$ mn 250,000
200,000
150,000
100,000
50,000
0 1920
1922
1924
1926
1928 1930
1932
1934
1936
1938
1940
1942
Commercial bank assets in the United States
1944 1946
1948
1950
1952
CONTRACTION HITS REGULAR COMMERCIAL LOANS HARDEST, BANKS SHIFT BALANCE SHEETS TO CASH AND MARKETABLE ASSETS
U.S.$ mn 250,000
200,000
150,000
100,000
50,000
0 1920
1922
1924
1926
1928 1930
1932
1934
Cash
1936
1938
Investments
1940
Loans
1942
1944 1946
1948
1950
1952
VOLUME OF BANK LOANS SHRINKS 50 PERCENT BETWEEN 1929 AND 1933 U.S.$ mn 90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
1946
Outstanding loans and advances by commercial banks in the United States
1948
1950
1952
RESTRICTIVE CREDIT POLICY AND SLUMPING ECONOMY TRIGGER UNPRECEDENTED WAVE OF BANK FAILURES Number, U.S.$ mn 4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0 1920
1922
1924
1926
1928
1930
1932
1934
Number of banks suspended
1936
1938
1940
1942
1944
1946
Volume of deposits in suspended institutions
1948
1950
1952
DURING 1933, MORE THAN 8 PERCENT OF ALL BANK DEPOSITS ARE "SUSPENDED" (ie FROZEN)
Per cent 10 9 8 7 6 5 4 3 2 1 0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
Deposit suspensions as percentage of total bank deposits
1944
1946
1948
1950
1952
COLLAPSING CONFIDENCE IN THE BANKING SYSTEM DRIVES STRONG PREFERENCE FOR CASH RATHER THAN BANK DEPOSITS U.S.$ bn 60
50
40
30
20
10
0 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 Currency held by public
Bank deposits
DEMAND FOR LIQUIDITY BECOMES EXTREME, DEPOSITS SHRINK EVEN AS CASH DEMAND RISES 12
10
8
6
4
2
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
Ratio of bank deposits to currency in circulation
1944
1946
1948
1950
1952
MONEY SUPPLY CONTRACTS 20-25 PER CENT, INTENSIFYING DOWNWARD PRESSURE ON BUSINESS ACTIVITY AND PRICES
US$ bn 180
160
140
120
100
80
60
40
20
0 1920
1922
1924
1926
1928
1930
1932
1934
M1 (Currency + demand deposits)
1936
1938
1940
1942
1944
1946
1948
M2 (Currency + demand deposits + time deposits)
1950
1952
INTENSE DEMAND FOR SAFE, LIQUID INSTRUMENTS DRIVES SHORT-TERM TREASURY BILL RATES CLOSE TO ZERO
Per cent 8
7
6
5
4
3
2
1
0 1920
1922
1924
1926
1928
1930
1932
1934
Yield on 3mth Treasury bills
1936
1938
1940
1942
1944
1946
Commercial paper rates for 4-6 mth paper
1948
1950
1952
Per cent yield
PRONOUNCED UPWARD SLOPE IN YIELD CURVE, DEMAND FOR SAFETY AT FRONT-END, FEARS ABOUT DEFAULT & INFLATION KEEP BACK END UP
8
7
6
5
4
3
2
1
0 1920
1922
1924
1926
1928
1930
1932
1Yr Aaa Corp Bonds
1934
1936
1938
5Yr Aaa Corp Bonds
1940
1942
1944
1946
10Yr Corp Aaa Bonds
1948
1950
1952
SHARP EASING IN NEARBY RATES ONLY GRADUALLY REFLECTED IN BACK END
Per cent 8
7
6
5
4
3
2
1
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
Commercial paper rates for 4-6 mth paper
1938
1940
1942
1944
1946
Yield on 10Yr Aaa-rated corp bonds
1948
1950
1952
FED STANDS BY AS MONEY SUPPLY AND BANK CREDIT COLLAPSE, NO REAL INCREASE IN FED'S BALANCE SHEET BEFORE 1934-1935
U.S.$ mn 60,000
50,000
40,000
30,000
20,000
10,000
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
Consolidated Balance Sheet of the Federal Reserve Banks
1946
1948
1950
1952
FED LENDING TO THE BANKING SYSTEM REMAINS STUBBORNLY UNCHANGED 1929-33, CENTRAL BANK REFUSES TO BOOST MONEY SUPPLY THROUGH QUANTITATIVE EASING
U.S.$ mn 30,000
25,000
20,000
15,000
10,000
5,000
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
Federal Reserve Credit
1940
1942
1944
1946
1948
1950
1952
LIQUIDITY PILES UP IN FEDERAL RESERVE U.S.$ mn
COMMERCIAL BANKS INCREASE EXCESS RESERVE BALANCES RATHER THAN RAISE LENDING
25,000
20,000
15,000
10,000
5,000
0 1920
1922
1924
1926
1928
1930
1932
1934
1936
1938
1940
1942
1944
Commercial bank reserves with the Federal Reserve System
1946
1948
1950
1952
CYCLICAL RECOVERY AND INTEREST RATES 1920-1953 LHS MANUFACTURING INDEX JAN 1920 = 100, RHS INTEREST RATES PER CENT
400
16
350
14
300
12
250
10
200
8
150
6
100
4
50
2
0 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 Manufacturing Output FRBNY Discount Rate (RHS) FRBNY advances to banks (RHS) FRBNY other loans secured on US government obligations (RHS)
0
FED GIVES ABANDONS CONVENTIONAL POLICY AFTER 1934, SWITCH FROM DISCOUNT RATE (COST OF MONEY) TO RESERVE REQ'MENT (QTY OF CREDIT)
20.00
30.00
18.00
28.00
16.00
26.00
14.00
24.00
12.00
22.00
10.00
20.00
8.00
18.00
6.00
16.00
4.00
14.00
2.00
12.00
0.00 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
10.00
FRBNY Discount Rate FRBNY advances to banks FRBNY other loans secured on US government obligations Reserve Requirements (RHS)
SHARE PRICES 1920-1953 DOW JONES INDUSTRIAL AVERAGE JAN 1920 = 100
400
16
350
14
300
12
250
10
200
8
150
6
100
4
50
2
0 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Manufacturing Output
Dow Jones Industrial Average
FRBNY Discount Rate (RHS)
0
NO SUSTAINABLE RECOVERY IN FARM PRICES UNTIL SECOND WORLD WAR,
Index Jan 1920 = 100
BUT FARM PRICES HAD BEEN TRENDING LOWER SINCE END OF FIRST WAR
250 225 200 175 150 125 100 75 50 25 0 1920
1922
1924
1926
1928
1930
1932
1934
1936
Winter wheat
1938
1940
Cotton
1942
1944
1946
1948
1950
1952
Index Jan 1920 = 100
ENERGY PRICES FALL, BUT RECOVERY UNDERWAY FROM 1934 AND PREVIOUS PRICE LEVEL MOSTLY REGAINED BY 1938
250 225 200 175 150 125 100 75 50 25 0 1920
1922
1924
1926
1928
1930
1932 Coke
1934
1936 Gasoline
1938
1940
Crude oil
1942
1944
1946
1948
1950
1952
SHARP GAINS IN METAL PRICES DURING 1936-1937 (STEEL RISES 25 PER CENT IN 1937) Index Jan 1920 = 100
FED RAISES RESERVE REQUIREMENTS AMID FEAR EXCESS LIQUIDITY IS DRIVING INFLATION
250 225 200 175 150 125 100 75 50 25 0 1920
1922
1924
1926
1928
1930
1932
Steel (billet)
1934
1936 Copper
1938
1940
Lead
1942 Zinc
1944
1946
1948
1950
1952
TIGHTENING OF RESERVE REQUIREMENTS IN 1937-1938 DRAINS $3 BILLION OF EXCESS RESERVES FROM SYSTEM, CONTRACTS CREDIT, AND TRIGGERS SECOND DOWNTURN 400
50
350
45
300
40
250
35
200
30
150
25
100
20
50
15
0 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952
Manufacturing Output (LHS)
Reserve Requirement (RHS)
10
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)