Hi bobcat.
This post is a reply to your post requesting sources for the European link to the 1920’s/30’s events surrounding the Great Depression, which can be found here:
Message 20316474
*** Quigley & Polanyi ***
It may have been that your question re: the European link to the 1920’s/30’s monetary events surrounding Great Depression was partially in response to my previous posts quoting from Carroll Quigley’s “Tragedy and Hope” and Karl Polanyi’s “The Great Transformation”.
I personally don’t know of any other books that treat the subject with a similar level of insight and precision. If you do come across any, please do let me know. Quigley’s book does provide a table of WholeSale Price Indicies in the U.S., Britain, France, Italy, & Germany every year from 1924 thru 1937, as well as a table on Industrial Share Prices in the U.K. and the U.S. every year from 1924 thru 1934. I will comment more on this later in this post.
A primary strength of Quigley’s and Polanyi’s books stem from their being very well-grounded in the geopolitics (or the political economy) of the time. To my mind, an analysis of economic and financial conditions and mechanics without appreciating their underlying geopolitical context and motivation will almost inevitably reach erroneous conclusions.
The strength of Quigley’s and Polanyi’s books significantly rests on the personal circumstances of the authors, in each case being well connected to the monetary elites and their motivations and machinations. Prior to fleeing Austria in 1934 for Great Britain, Karl Polanyi was a member of the editorial staff of Vienna’s leading financial newspaper. Subsequently, Polyani taught as a Professor at Oxford University, the University of London, and Columbia University.
Quigley, OTOH, is a special case unto himself. When he published Tragedy and Hope in 1966, the financial elites were NOT happy. Effectively, Quigley let a story out of the bag that they had never intended to be revealed. Upon its publication in 1966, the book was immediately pulled from the shelves, and only very recently has it become available for purchase again. Quigley was (is?) a Professor of History at the Foreign Service School of Georgetown University, and formerly taught at both Princeton and Harvard. Bill Clinton mentioned Quigley by name with gratitude in his presidential inauguration speech.
Here’s a quote from Quigley on the banking elite whose history he was privileged:
"I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960's, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments. I have objected, both in the past and recently, to a few of its policies...but in general my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known."
Of course, in Quigley’s book the motivations of this financial elite do not come across as quite so benign, as in the following quote:
The powers of financial capitalism had a far-reaching (plan), nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.
Yikes! Holy New World Order batman!
A couple other books whose assessment of geopolitics and political economy I found provocative. The first is an absolute classic on par with the above 2 books – it is Social Origins of Dictatorship and Democracy – Lord and Peasant in the Making of the Modern World, by Barrington Moore, Jr. (pub. 1966).
If you like, this book provides the social political economy context for the foundation of monetary regimes from the birth of modern capitalism in England to the present day. It focuses particularly on the experiences of England, France, the United States, China, Japan, and India. However, it does not specifically analyze the mechanics of the financial system.
The other book is Paul Kennedy’s The Rise and Fall of the Great Powers – Economic Change and Military Conflict from 1500 to 2000 (pub. 1988). Clocking in at just under 900 pages (with a full 177 pages just devoted to footnotes and a bibliography!), it’s quite impressive. In particular, Kennedy examines the changes in industrial prowess that accompany changes in geopolitical power during the period discussed. Chapter 6 of Kennedy’s book “The Coming of the Bi-Polar World and the Crisis of the ‘Middle Powers’: Part Two, 1919-42 specifically discusses the collapse of the international order between the end of World War I and World War II, including the Great Depression. It includes a brief analysis of the collapse of the Gold Standard, and the 3 “currency blocs” that had arisen by 1932 – a gold block led by France; a yen bloc, dependent upon Japan, in the Far East; and a US-led dollar bloc. Kennedy also mentions “completely detached from these convulsions, a USSR steadily building ‘socialism in one country’. He would soon be able to add Germany to the USSR as a country detached from the liberal capitalist monetary regime. But if you read Quigley and Polanyi, to my mind, Kennedy doesn’t have all that much to add really.
*** A Point of Clarification – Insolvency “at the periphery” … ***
You had stated in your post:
“Seems to me that the trigger the last time ‘round came when the upstart power (U.S.) had its asset bubble burst, topping the debt bubbles of the old empire.
BTW, I thought your post very well summarized the mechanics of the period. But just to clarify, to my understanding the rupture of the global financial system and U.S. financial markets (debt and equity) in the late 1920’s/early 1930’s was really a crisis of liquidity – contributed equally by “insolvency at the periphery” of the system (i.e. massive loans which could not be paid) and “illiquidity at the core” of a system (resulting from extending massive loans that could not be paid). Again, I believe there will be significant parallels this time round, but let me first explain.
Here’s Polanyi’s take from “The Great Transformation”, emphasizing the periphery:
In the early thirties, change set in with abruptness. … The root cause of the crisis, we submit, was the threatening collapse of the international economic system. … Russia had astonished the world by the destruction of the ruble, the value of which was reduced to nothing by the simple means of inflation. Germany repeated this desperate feat in order to give lie to the Treaty; the expropriation of the rentier class, which followed in its wake, laid the foundation for the Nazi revolution. The prestige of Geneva rested on its success in helping Austria and Hungary to restore their currencies, and Vienna became the Mecca of liberal economists[my note: i.e. much like Argentina in the late 1990’s was the poster child for orthodox free market liberal economics] on account of a brilliantly successful operation on Austria’s krone which the patient, unfortunately, did not survive. In Bulgaria, Greece, Finland, Latvia, Lithuania, Estonia, Poland, and Rumania the restoration of the currency provided counterrevolution with a claim to power. In Belgium, France, and England the Left was thrown out of office in the name of sound monetary standards. An almost unbroken sequence of currency crisis linked the indigent Balkans with the affluent United States through the elastic band of an international credit system, which transmitted the strain of the imperfectly restored currencies, first, from Eastern to Western Europe, then from Western Europe to the United States. Ultimately, the United States itself was engulfed by the effects of the premature stabilization of European currencies. The final breakdown had begun.
The first shock occurred within the national spheres. Some currencies, such as the Russian, the German, the Austrian, the Hungarian, were wiped out within a year. Apart from the unprecedented rate of change in the value of the currencies there was the circumstance that this change happened in a completely monetarized economy.
Quigley comments on problems both “at the periphery” and “at the core” of the global monetary order, beginning with post WWI:
… In the defeated and revolutionary countries (Russia, Poland, Hungary, Austria, and Germany), the inflation went so far that the former monetary units became valueless, and ceased to exist. In a second group of countries (like France, Belgium, and Italy), the value of the monetary unit was so reduced that it became a different thing, although the same name was still used. In a third group of countries (Britain, the United States, and Japan), the situation was kept under control,
As far as Europe was concerned, the intensity of the inflation increased as one moved geographically from west to east. Of the three groups of countries above, the second (moderate inflation) group was the most fortunate. In the first (extreme inflation) group the inflation wiped out all public debts, all savings, and all claims on wealth, since the monetary unit became valueless. In the moderate-inflation group, the burden of the public debt was reduced, and private debts and savings were reduced by the same proportion. In the United States and Britain the effort to fight inflation took the form of a deliberate movement toward deflation. This preserved savings but increased the burden of the public debt and gave economic depression.
Quigley in his book discusses three specific crisis “episodes” surrounding the onset of the Great Depression: (i) the Crash of 1929 on Wall St., (ii) The Crisis of 1931 which forced Great Britain to abandon the Gold Standard, and (iii) the Crisis of 1933 which saw banks of the whole of the U.S. closed by Executive Order on March 4th, and ultimately forced the U.S. off the Gold Standard.
Here’s a great example of problems “at the periphery” which were the proximate cause of Great Britain abandoning the Gold Standard:
… On May 8, 1931, the largest Austrian bank, the Credit-Anstalt (a Rothschild institution), with extensive interests, almost control, in 70 percent of Austria’s industry, announced that it has lost 140 million schillings (about $20 million). The true loss was over a billion schillings, and the bank had really been insolvent for years. The Rothschilds and the Austrian government gave the Credit-Anstalt 160 million to cover the loss, but public confidence had been destroyed. A run began on the bank. To meet this run the Austrian bank called in all the funds they had in German banks. The German banks began to collapse. These latter began to call all their funds in London. The London Banks began to fall; and gold flowed outward. On September 21st England was forced off the gold standard.
Germany begged for relief on her reparations payments, but her creditors were reluctant to act unless they obtained relief on their war-debt payments to the United States. The United States had an understandable reluctance to become the end of a chain of repudiation, and insisted that there was no connection between war debts and reparations … When Secretary of the Treasury Mellon, who was in Europe, reported to President Hoover that unless relief was given to Germany immediately on her public obligations, the whole financial system would collapse, with very great loss to holders of private claims against Germany, the president suggested a moratorium on intergovernmental debts for one year. Specifically, America offered to postpone all payments owed to it for the year following July 1, 1931, if its debtors would extend the same privilege to their debtors.
Acceptance of this plan by the many nations concerned was delayed until the middle of July by French efforts to protect the payments on commercialized reparations and to secure political concessions in return for accepting the moratorium. It sought a renunciation of the Austro-German customs union, suspension of building on the second pocket battleship, acceptance by Germany of her eastern frontiers, and restrictions on training of “private” military organizations in Germany. These demands were rejected by the United States, Britain, and Germany, but during the delay the German crisis became more acute. The Reichsbank had its worse run on July 7th; on the following day the North German Wool Company failed with a loss of 200 million marks to the city of Bremen where its office was) and the Darmstadter Bank (one of Germany’s “Big Four Banks”) which lost 20 million in the Wool Company. Except for credit of 400 million marks from the Bank for International Settlements and a “standstill agreement” to renew all short-term debts as they came due, Germany obtained little assistance. Several committees of international bankers discussed the problem, but the crisis became worse and spread to London. …
Note the links in the chain … from Austria (periphery) to Germany (periphery), to London (core), to the U.S. (core). And the loans in question in the Austrian bank would likely have been to entities even more deeply associated with the periphery – i.e. the old Austrian-Hungarian empire of the Hapsburg Empire – i.e. Hungary and the Balkans.
Anyone concerned with the recent default of one’s of Russia’s largest banks??? (no grin?)
*** Illiquidity “at the core” … ***
Of course, insolvency at the periphery eventually translates into illiquidity at the core. The following previous post of Quigley’s blow-by-blow account of the monetary mechanics of this “illiquidity at the core” is illustrative:
Message 17855835
BTW, I thought George Soros’ comments around the time (or was it shortly after) the Asian Financial crisis of the late 1990’s was very apropos – he said something like “this time the crisis was at the periphery, next time it will be at the core”. Obviously, one day I feel he will be right … and that day may not be far away.
*** Asset & Price Inflation ***
Bobcor, specifically to your question regarding asset prices, price levels, interest rates, debt levels, etc. Here’s additional information from Quigley:
Regarding price levels, Quigley identifies the following periods (which have overlap depending on the specific country/economy in question:
1 – Inflation – 1919-1925
2 – Stabilization – 1922-1930
3 – Deflation – 1927-1936
4 – Reflation – 1933-1939
5 – Inflation – 1939-1947
Here’s Quigley’s summary of price levels from 1924-1937:
…As a result of these conditions and the deflationary economic conditions described in Chapter 2, prices began to fall, at first slowly and then with increasing rapidity. The turning point in most countries was in 1925-1926, with Great Britain one of the earliest (January 1925). In the first half of 1929, this slow drift downward began to change to a rapid drop. The following table will show the changes in wholesale for five principle countries:
Wholesale Price Index
(1913=100)
………..United States……Britain………France……..Italy………Germany
1924………141……………166…………..489……….554…………137
1925………148……………159…………..550……….646…………142
1926………143……………148…………..695……….654…………134
1927………137……………142…………..642……….527…………138
1928………139……………137…………..645……….491…………140
1929………137……………120…………..627……….481…………137
1930………124……………104…………..554……….430…………125
1931………105……………102…………..520……….376…………111
1932……..…93…………..…90…………..427……….351…………97
1933…..……95……………..90…………..398……….320…………93
1934………108……………..92…………..376……….313…………98
1935………115……………..93…………..339……….344…………102
1936…..…..116……………..99…………..411……….385…………104
1937………124……………114…………..581……….449…………106
[my note: I don’t understand the German price index #’s here, given German inflation in the early 1920’s. I don’t have a problem with relative German price stability post 1925, and even outright deflation beginning in 1928, but I can’t figure the 1924 level of 137 given a base reference of 1913=100)]
The economic affects of these soft prices after 1925 were adverse, but these effects were concealed for a considerable period because of various influences, especially the liberal credit policies of the United States (both foreign and domestic) and the optimism engendered by the stock-market boom. The façade of prosperity over unsound economic conditions was practically worldwide. Only in France and the United States was it a boom in real wealth, but in the latter it was by no means as great as one might think from a glance at stock prices. In Britain, the boom appeared in the form of the flotation of new stocks of unsound and fraudulent companies and a minor stock-market boom (about one-third as fast as a rise in security prices as in the United States). In Germany and in much of Latin America, the boom was based upon foreign borrowing (chiefly from the United States) the proceeds of which were largely put into nonproductive construction. It Italy, held down by the overvaluation of the Lira, the boom was of short duration.
Regarding stock prices, here’s Quigley’s #’s for Industrial Share Prices in the U.K. and the U.S. from 1924-1934:
Industrial Share Prices
(1924=100)
…………..United Kingdom……United States
1924….….……100…………….……100
1925….….……109…………….……126
1926….….……115…………….……143
1927….….……124…………….……169
1928….….……139…………….……220
1929….….……139…………….……270
1930….….……112…………….……200
1931….….….…87…………….….…124
1932….….…….84…………….…...…66
1933….….……103…………….…..…95
1934….….……125…………….……116
The stock market boom in the United States was really much more drastic than is indicated by these index numbers, because these are yearly averages, and include sluggish stocks as well as market leaders. The boom began as far back as 1924, as can be seen, and reached its peak in the fall of 1929. By the spring of 1929 it had become a frenzy and was having a profound affect on business activity, on domestic and international finance, on the domestic affairs of foreign countries, and on the psychology and modes of life in America.
Regarding Debt-to-GDP ratios and perhaps more importantly total outstanding credit obligations relative to GDP, I haven’t found much in the way of global statistics, but the following graph of total Credit Market Debt as a % of GDP on p. 2 of the Contrary Investor paper “The Mistakes of our Grandparents” from Feb 2004 pretty much says it all:
contraryinvestor.com
Also, for an analysis of credit conditions of the 1920’s and how they compare to today, Doug Noland had a pretty decent piece on June 18, 2004 titled Monetary Instability and Lessons Not Learned, which can be accessed at the following link:
prudentbear.com
Anyway, hope the above provides some of the additional information/context you were looking for.
Regards,
Glenn |
