Originally from my blog;
………………………………………………………………………….% Decline………..Cumulative
September 3 1929 to November 13 1929………………….-48%………………-48%
1’st Rally November 13 1929 to April 1’st 1930…………..+48%………………-23%
This part of the “Crash” was the stockmarket component. In essence driven by excessive leverage and speculation within the stockmarket itself.
*Leveraged Holding Companies
*Investment Trusts [highly leveraged]
*Low Margin requirements [highly leveraged speculators]
……………………………………………………………………………..% Decline………..Cumulative
First Banking Crisis April 17 1930 to September 16 1930….-36%…………………-59%
2′nd Rally December 16 1930 to February 24 1931………..+23%…………………-49%
The high number of Bank failures through the 1920’s was largely the result of hard times through the farming sector. The 1907 Banking crisis had led directly to the formation of the Federal Reserve, to mitigate such problems.
In 1930 Bank suspensions, or failures, were $287 million. In the first Banking crisis of 1930, this figure rose to $550 million very quickly, involving some 608 Banks. One of the failed Banks was “The Bank of the United States, a member Bank of the Federal Reserve. When 400,000 depositors lost their money, this materially changed perceptions
Economic change
Date…………………GDP…………Unemployment………..CPI…………….Retail Sales
Jun 1929……………100…………….100…………………100………………..100
Dec 1929…………..100.6…………..92.3………………..99.7……………….98.3
Jun 1930……………98.2……………83.8………………..99.1……………….90.6
As can be seen, after the first Banking crisis, and stockmarket plunge, the economy had constricted by 12%. The effects largely due to the Banking sector, rather than the stockmarket, as in December 1929 there had been an expansion. Certainly economic data lags somewhat, however, stockmarket plunges were a common experience in that era.
Stockmarket Plunges
January 1907 to November 1907…………………………………-44%
November 1916 to December 1917………………………………-39%
November 1919 to August 1921………………………………….-47%
September 1929 to November 1929……………………………..-48%
Thus we can see that the market plunge, while brutal, was not extraordinary in the light of previous experience.
………………………………………………………………………………..% Decline………..Cumulative
2′nd Banking Crisis February 24 1931 to October 5 1931…….-56%………………-77%
Potential stability October 5 1931 to March 8 1931…………..+1%……………….-76%
Economic Effects……..GDP…………Unemployment………..CPI…………….Retail Sales
June 1931……………..89.5………………70………………….94.8………………92.4
Dec 1931………………83.1………………62.2……………….92.1………………84.3
The Banking crisis drove GDP to an almost 30% contraction, and unemployment lept upwards with a concurrent falling in Retail Sales.
The Final Crisis………………………………………………….Market decline………Cumulative
The Gold Drain March 8 1932 to July 8 1932……………….-54%…………………….-76%
The economic crisis had become so bad in the rest of the world, and with the United States holding some 45% of the worlds gold, that several countries including France and Great Britain, were forced into revaluations and devaluations. With interest rates spiking upwards in Europe, Gold started to drain out of the US. Fearing a US devaluation, prices in the market once again plunged.
The economic consequences of a feared gold drain and devaluation, dealt a heavy blow to an already struggling economy.
Economic Effects……..GDP…………Unemployment………..CPI…………….Retail Sales
June 1932………………77.8……………48.6…………………88.2……………..74.9
Dec 1932……………….70.1……………57.2…………………84.8……………..69.3
As the second Banking crisis erupted worldwide with banking failures in Austria and Hungary, at the time still very important even though WWI had broken the empire, US funds held in the European banks became frozen.
It is here that the Federal Reserve made possibly it’s largest mistake, and the one that they are continuously criticised for, they in essence sat on their hands and did nothing. Rather than furnish liquidity via an elastic currency to the system, especially after one banking crisis the previous year, they did nothing.
It was this failure to provide liquidity that drove Corporations and individuals alike to scramble to cash and withdraw deposits from the system. The Gold crisis, then threatened the actual worth of the currency, and drove further redemptions from the deposit base by National Governments.
The 2008 crisis is at it’s heart a two pronged problem. First we had a Real Estate bubble form on the back of excessively cheap credit courtesy of Alan Greenspan, in an effort to cushion the effects of the 2000 stockmarket crash from the bubble in internet based common stocks. It was at it’s heart no different from other bubbles in new technologies, Railways, Automobiles, Electricity, Telephones.
This Real Estate bubble, as is Wall St’s want, was leveraged to very high levels via amongst others, derivatives. As these derivatives potentially unwind, the sheer leverage now threatens the viability of any bank with exposure to the CDS, as the figures dwarf their available capital.
As the Central Banks around the world gradually have evolved plans to deal with the problems, so will the problems in the banking system resolve. The problem though remains the damage that potentially can be wrought to the economy in the process.
That the Federal Reserve acted quickly under Bernanke, the ultimate damage, once contained, should resolve with a recession of indeterminate depth, rather than a repeat of the depression experience of the 1930’s. Certainly, with co-ordinated Central Bank action, the chances improve, rather than decrease.
http://leduc998.wordpress.com/2008/10/13/the-1929-crash-contrasted-with-the-2008-crash/#respond
jog on
duc