86 years ago, from the Black Thursday on the New York Stock Exchange, the Great Depression began
October 24 1929 of the year occurred an event whose significance is difficult to overestimate: “Black Thursday”, the collapse of the New York Stock Exchange, which led to the Great Depression - the most famous economic crisis of recent centuries. 86 years - the date is not round; however, the event is not one of those that are celebrated with picnics and evening fireworks.
Nevertheless, there are many reasons to believe that it was the Great Depression that made the United States the state that we know now. Let's see how it was.
Shareholders are housewives and shoemakers
To begin with, we will find out from which height America has fallen into the economic abyss, how successful the 20s were for it.
World War I allowed the States not only to pay off their debts, but also to issue loans to 11 billion dollars for European allies (the purchasing power of the dollar in 1920's was 12,2 times higher than now). Military orders spurred growth in the real sectors of the economy: in the early 1920's, the US accounted for 50% of world coal production, about 60% of iron and steel smelting, 75% of oil production.
Since the Allies paid a significant part of the supplies with gold, the States accumulated in their vaults almost half of the world's precious metal stock. American overseas investment increased from 2,6 billion to 7 billion dollars. In fact, American investors bought most of the deposits in Latin America and the Caribbean.
Economic growth has led to an increase in the well-being of a significant part of the population. Formed a middle class in the current sense of the term. Naturally, enterprising Americans could not begin to invest free money in securities and stock exchange transactions, since all conditions were good for this: a huge number of exchanges, professional brokers, growing profits of tens of thousands of companies. Stocks bought everything: workers and movie stars, shop owners, clerks and housewives. Well-known banker and financier John Pierpont Morgan recalled that a few weeks before the market crash, a street shoemaker asked him if the shares of the railway company he had bought would be profitable.
American inhabitants could not even imagine that this celebration of life would soon end.
Margin Loans: Disaster Trigger
By the end of 20's, the inertia of post-war reconstruction weakened. Available markets have been exhausted, labor productivity has ceased to grow, and investment efficiency has begun to fall. An overproduction crisis was brewing, dragging deflation behind. First, the Americans stopped buying housing, then cars.
However, these were only macroeconomic prerequisites for the coming crisis, which had little effect on the behavior of market participants. The real trigger of the financial catastrophe was the shares of the margin loan.
A feature of these securities was that they could be bought for only 10% of the nominal value. Unpaid 90% was a kind of loan issued by a brokerage firm to its client. Thanks to this, even poor clerks could play on the exchange of significant assets. However, the devil, as always, was in the details. The agreement had a clause that allowed the broker to require the holder of the securities to contribute the missing part of the value of the shares within 24 hours.
The fact that brokers massively took out loans to buy securities from banks made the seemingly well-being of stock exchange even more fragile. Existing portfolios of stocks and bonds acted as collateral.
Thus, millions of Americans (according to some estimates - almost the entire working population of the United States) one day were on the hook at brokerage houses. And those, in turn, were in exactly the same position with respect to the banks.
October 24 1929, several banks suddenly stopped issuing loans to brokers for more than one day. This forced speculators to sell shares bought in debt in order to pay off loans, otherwise they were threatened with the loss of all assets.
Already by 11 o'clock in the morning, an hour after the opening of trading on the New York Stock Exchange, Wall Street was in panic. On this day, 12,6 million securities were sold: some of the players still had the means to buy cheapening stocks. The vice-president of the exchange Richard Whitney himself, trying to save the situation, spent around several hours about 250 million dollars to buy blue chips. Admittedly, he almost managed to stop the panic. Nevertheless, the Dow Jones business activity index fell by 11% by the end of trading. Financiers and newspaper workers immediately called this day “Black Thursday”, not knowing that it would look light gray against the background of subsequent events.
Dow Jones Industrial Average in 1929 — 1930 Schedule: www.wikipedia.org
On Friday, however, the situation did not improve. Brokers threw on the market another 30 million shares. The flywheel of panic gradually unwound, and the snowball of the financial collapse was already sweeping down, expanding before our eyes. The term “Black Friday” was born, and it must be admitted that the shade of gray really thickened.
The downtrend continued after the weekend. It was on Monday, October 28, the exchange finally went into an uncontrollable peak. If in the first two days the big bankers were still trying to play on the stock market fall, now this was out of the question. In the American calendar, there are two more dark days of the week - Monday and Tuesday.
The first wave of bankruptcies began, followed by suicide. One of the first victims of the collapse of Wall Street were the gunners James Riordan and Jesse Livermore; then a large resonance received a double suicide of clerks who had a joint brokerage account: holding hands, they jumped off the roof of a skyscraper. In the following weeks, in the words of the famous American comedian Eddie Cantor, the hotel administrators had a habit of asking new guests: “Do you need a room to sleep or jump?” (For sleeping or jumping?).
By the end of the week, the US stock market had lost 30 billion dollars - more than the United States had spent for the entire First World War.
Nuclear explosion effect
It is unlikely that the collapse of the exchange initially thought of as an uncontrollable process. Most likely, its organizers planned to buy the most attractive assets on the cheap with the subsequent correction. However, the genie burst from the bottle and healed his own life.
Bearing losses, banks began to close credit lines for industrial enterprises. Citizens who lost part of their savings on the stock exchange (there were at least 25 million of such savings) rushed to withdraw funds from deposits en masse. Banks faced liquidity shortages; lack of funds led to bankruptcies, and those, of course, spurred panic among the population. The spiral of the shortage of means of payment, the demands to fulfill obligations and bankruptcies unwound more and more and eventually destroyed 16 thousands of credit institutions.
The bearish trend has spread from the stock market to the commodity exchange: 5 in November there was a collapse in wheat prices. During the auction, its price dropped to almost zero, no one wanted to buy cereal. A week later, cotton prices collapsed in a similar way.
The explosion wave of stock market collapse diverged across the American economy, sweeping one segment after another. The collapse of the banking sector led to massive ruin of enterprises. Over the next few years, 135 747 enterprises and firms went bankrupt. The 19 railway companies went bankrupt. The businessmen who stood on their feet chose to cut costs and began mass layoffs, which killed consumer demand in the bud, and with it their own future.
15 million Americans - 18% of the working population - have lost their jobs. By 1932, the number of unemployed increased to 17 million; another 60 million had part-time employment. And only 10% of citizens of 125-million of the country could boast of full-fledged jobs.
The crisis has reached agriculture: 5 million farmers are left without land, unable to pay taxes or pay off debts. The situation was paradoxical: in the cities, millions of Americans suffered from hunger, and agricultural producers had no one to sell milk, meat, fruits and vegetables. About 7,4 million people became victims of hunger during the years of the Great Depression. Newspapers reported that residents of small cities began to eat grass, shoot dogs and squirrels.
Bitter pills, or the great division of America
In 1932, President Herbert Hoover was replaced by Franklin Delano Roosevelt. Having inherited the Great Depression, he immediately followed the path of hard state planning. Understanding that the most radical means are needed for the treatment of the economy, he was ready to use them.
The Roosevelt program, dubbed the "New Deal", is devoted to hundreds of monographs and textbooks, plus one investigation by the US Supreme Court. The judges retroactively recognized the president’s economic policy as completely unconstitutional. And - just completely acquitted her.
President Franklin Delano Roosevelt. Photo: AR
Roosevelt devalued the dollar and announced a bank holiday in the country. This was necessary so that citizens would not withdraw deposits until their savings were devalued. The Americans were forbidden to own monetary gold: all bars and coins were ordered to be handed over to the state before 1 in May 1933. Attempting to conceal a piece of precious metal threatened with ten years in prison. It is noteworthy that under Roosevelt, the state bought gold at the price of 20,66 dollars per troy ounce. The right of possession of the yellow metal was returned to the Americans only in the 1975 year, when an ounce was already worth 195 dollars. 42, the most democratic state in the world, deprived citizens of the right to invest savings in assets that are not subject to aging, deterioration and devaluation.
War as a lifeline
In parallel, the process of consolidation of the banking system was going on: the surviving large banks bought up small and medium-sized credit organizations. The Federal Reserve System, which began lending to partner banks, did not stand aside either. The state conducted a separation of commercial and investment banks, allocating direct loans to industry and transport companies. Farmers ’debts were restructured and partially written off. A course was taken to reduce unemployment and create jobs. Roosevelt and his team managed to reduce the fall in GDP, increase employment and stabilize the financial system.
However, the effect of all these measures remained unstable. In 1937, the president tried to balance the budget by reducing government spending — and the United States immediately covered the second wave of recession.
It is difficult to say how long the crisis would have lasted if it were not for the Second World War. Huge military orders, and then the help of a crushed Europe allowed the American economy to recover steady growth. However, it was not at all the kind of economy that collapsed 15 years ago into the nether Great Depression.
America needs your hemoglobin
The States learned how to conduct macroeconomic policies, realized the perniciousness of deflation, and learned how to manage the money supply. The collapse of the British colonial system opened up previously inaccessible markets for American producers, and the approval of the dollar as a global currency allowed the export of money to begin, minimizing the emission risks of emissions. The democratic power has learned to live in debt, to stimulate production with expectations of growing consumption, and to lend to its citizens for decades to come.
But most importantly, American politicians and financiers finally realized the tremendous power and significance of the war as the most effective doping and fuel for their economies. Since then, for more than half a century, America has been living and developing thanks to the policy of "little victorious wars." As soon as the country is facing another recession, the authorities already know what to do. The pathetic rhetoric of the next war raises the share prices of companies associated with the military-industrial complex; on the expectations of military orders, the exchange prices of metals and oil are rising, and the life-giving stream of dollars rushes into the manufacturing sectors.
The United States has chosen the path of not a phoenix, but a vampire: smart, ruthless, able to fly and, most importantly, immortal as long as it can be fed by someone else's hemoglobin. It was on “black Thursday” of October 24, 86 years ago, that the reincarnation of an ordinary capitalist state into a global superharvest began.