I found exactly the type of book about the Great Depression I was looking for, Charles Kindleberger, "The World in Depression, 1929-1939." He was an economist who taught at MIT, but the interesting thing is that he graduated from high school in 1929, and during college and graduate school and afterwards had jobs on Wall Street, at the US Treasury, the Federal Reserve and the Bank of International Settlements. Very heavy on fact, very low on theory.
He draws all the connections I was looking for. He talks about reparations, the gold standard, international exchange rates, commodity prices, tariffs, the whole bit.
Interestingly, he doesn't think the stock market boom was a bubble, although there was some fraud, e.g. Insull. He says the recession started in the summer of 1929, but it wasn't widely noticed. He thinks the trigger for the October 24, 1929 crash was the drop of available funds for broker's loans because of withdrawal by foreigners. He doesn't know why that happened, though. Maybe caused by the Bank of England raising interest rates which drew funds back to London.
Another interesting item is that New York banks held back on margin calls and took over loans called by outsiders in an effort to prop up prices. In October alone New York banks took over $1 billion of these loans.
The Federal Reserve violated the standing orders of the FOMC and bought $160 million of securities in the week ending October 30 and $370 millinn in November. These actions were later ratified by the Board of Governors. Liquidation of foreign balances and loans in New York continued - from October 1929 to the end of the first quarter 1930, $450 million was withdrawn and another $100 million bought from private hands by foreign central banks. Half of the withdrawals were for accounts in the United Kingdom.
The liquidity crisis spread rapidly, and is too complicated to describe here. But the interesting thing to me is that the lack of liquidity started in the summer of 1929. Left unresolved is the chicken-and-egg question. Did the stock market boom cause the sudden lack of liquidity by sucking it all in, or did the sudden lack of liquidity have other causes? If the latter, what are they?
There's no doubt that the Fed raised interest rates by 1% in August, 1929, in an effort to slow down the stock market boom, but so far I haven't read anything about the open market operations in this time frame.
From what I am reading in the microfilmed New York Times, the lack of liquidity was in large part due to not enough gold being available. "Not enough gold" doesn't make sense in a free market, if there's not enough gold then the exchange rate between dollars and gold, and the pound and gold, and the pound and the dollar has to be adjusted, and the Deutschmark and the Swiss franc and the French franc, too. An increase in the money supply increases the real price of gold. Keeping the dollar pegged to an artificial exchange rate is deflationary - I think. When assets deflate, their value as collateral for loans disappears. When loans don't have sufficient collateral, banks collapse. Which is what happened.
As an aside to Magner, from what I am reading the Austrian economists didn't believe in a gold standard, they believed in commodity backed money. No more money would be created than what was needed for business purposes, which is what I have been arguing. |
