Thursday, May 17, 2007
Quincy Howe's World Diary 1929 -1934
From the prologue:
IN THE Wall Street crash of 1929 the United States lost what it had fought for in the World War. Beginning in 1914, Allied orders for food and munitions created a boom in American agriculture and industry that continued until March, 1917, when the British Treasury, the last source of Allied credit, exhausted its borrowing power. At that point the United States had to decide between calling a sudden halt to the boom or supporting the Allies. President Wilson chose the second course, and the American Treasury with its Liberty and Victory Loans took up the burden that the British Treasury had dropped. The country thus avoided a sharp depression by bowing to events beyond its own frontiers. American isolation had come to an end.These are excerpts from the 1931 entries. First, the summary:
The slump that the War had postponed again threatened to creep over the land in 1920. This time, however, the automobile industry, installment buying, and foreign loans based on war-time profits turned the tide. The factories built since 1914 shifted from war-time to peace-time production, and for the next ten years the world marveled at American prosperity. Then, during the summer of 1929, consumption began to lag, stock prices wavered, and on October 24 came the worst crash in the history of the New York Stock Exchange, when nearly thirteen million shares went overboard in a panic of selling,
Less than a year had passed since Herbert Hoover informed his fellow countrymen that poverty had been forever abolished in the United States, promised them a chicken in every pot, and received the largest popular vote ever recorded by a candidate for the American Presidency. The events on Wall Street disturbed him not at all "The fundamental business of the country is on a sound and prosperous basis," he declared on October 25.
After two more sharp breaks in the market he announced on November 15 that "any lack of confidence in the basic strength of the United States is foolish." On November 21 the leaders of industry, banking, and commerce met at the White House and promised to cooperate with the Government and not to reduce wages. Among those present was Henry Ford, who announced that wages in his factories would be raised. On December 3 the President declared, "I am convinced that we have reestablished confidence." And the best opinion in England agreed with him. The Manchester Guardian regarded the Wall Street crash as "a pure gambling crisis," and the London Times went so far as to declare that "in the main speculation rested on a sound basis." The fact that brokers' loans had reached the record figure of eight billion dollars one tenth the national income for the year shows how far this speculation had gone.
What had happened was that thousands of gamblers had purchased stock on margin that is to say, they had put up a fraction of the purchase price and the broker had supplied the rest. If the gamblers could sell the stock at a higher price than had been paid for it, they pocketed the entire profit, but if the stock fell by as much as they had invested, it reverted to the broker, who either demanded more money from the gam bler or sold the stock himself. Now the crash of 1929 not only wiped out the entire proceeds of thousands of gamblers; it even left many brokers holding stock that was worth less than what they had put into it. And since the brokers in their turn had borrowed from the banks, using the stocks as securities for their loans, the entire financial system of the nation suffered. Nor were brokers the only people who had bor- rowed from the banks on securities that had suddenly fallen from twenty to fifty per cent in value.
Shortly before American finance suffered this blow, the leading bankers of the world had prepared a scheme to rescue the finances of Germany. Because the Versailles Treaty had declared Germany solely responsible for the War, the Allied Powers had presented that country with a reparations bill of a hundred and thirty-two billion marks the estimated cost of the War in May 1921. Three years later the Germans agreed to begin making payments through the medium of the Dawes Plan, which had no date of expiration and which put German finances under the supervision of a foreign Agent General for Reparations with headquarters in Berlin. The payments, however, came out of foreign, not German, pockets, and a handful of international bankers instantly collected handsome profits. In. the United States, for instance, a banking syndicate sold Dawes Plan bonds to the Ameri- can public and turned over the proceeds, minus the usual commission, to the German Government. In that way Germany raised enough money to pay reparations for a few years and to stabilize the mark.
What had happened was that after the Wall Street crash Frenchmen withdrew the money they had been lend- ing to New York and deposited seventeen billion francs in the banks of Great Britain, payable in pounds sterling. The British then used these deposits, on which they paid two and three per cent interest, to extend credit to German banks at five and six per cent. The German banks in turn extended credit to Vienna at eight and nine per cent, and Vienna extended credit to the banks of Bucharest and Budapest at twelve per cent. But the Hungarian and Ru manian farmers who had borrowed from the banks in their national capitals saw the price of wheat suddenly decline fifty per cent in the autumn of 1930 and therefore could not repay their loans. Which explains why the Credit-Anstalt in Vienna collapsed before the Danat Bank in Berlin, and why the Bank of England, quite apart from political considerations, cared more about saving Austria than the Bank of France did.How it played out:
The same fall in the price of raw materials that had caused half a dozen revolutions during 1930 continued to make trouble during 1931. On May 23 the eleven largest wheat-exporting nations adjourned a futile conference in London, declaring that there was. more wheat in the world than could be sold at a profit. The United States had opposed fixing an export quota for each country but favored reduction of acreage; the Russians favored an export quota provided they could sell as much abroad as they did before the War, when they exported half again as much wheat as the United States. They refused, how- ever, to consider a reduction of acreage. On May 29 the American Farm Board announced that it would continue buying wheat until June 30 at higher and higher prices, and then stop. Within a week grain prices in Chicago dropped below the world level and wheat to be delivered in July fell to 57 cents a bushel, the lowest price since 1896. ...And so the stage was set. In 1930, the governments of Bolivia, Peru and Argentina had been overthrown. In Bolivia, the government of President Siles had racked up tremendous foreign debt, and almost 60% of the budget was being used to support the Bolivian military or pay on the foreign debt. The military deposed him to try to prevent a populist revolution, which had as one of its goal to nationalize the oil wells. Shortly thereafter, President Leguia of Peru was deposed by a military junta. Peru had racked up even more foreign debt than Bolivia. Nearly simultaneously, President Irigoyen of Argentina, who had been a populist, fell when an Argentinian general led a march on the capital at the head of army units. Argentina's exports had fallen through the floor, it was forced to export gold, and the result was severe inflation which eroded his base and panicked the landowners. In China, where famine had been widespread for years, civil war was the norm rather than the exception. In India, Gandhi was leading the breakaway movement from the British Empire with near universal support. In Russia, which was in the throes of the Five Year plan, the drive to export agricultural goods was on to support Russia's attempt to industrialize. When the Japanese army basically moved on its own behest (the civilian government was controlled by the peaceful faction and had nothing to do with it), one of the reasons may have been that the Imperial clan and the Army feared the radicalism of Japan's growing ranks of educated, unemployed elite. Japan's growing textile mills during this period paid very little but were able to export enough to nearly crush the industry in England. A world which produced an oversupply of necessities was suddenly experiencing a crush of poverty which prevented masses of people buying what they needed, thus creating more unemployment and continually reinforcing the drop in consumption.
THIS SLUMP in farm prices played an important part in the events of June. In 1929 the Credit-Anstalt, the largest bank in Austria, had taken over a smaller bank that specialized in farm mortgages. But the declining value of farm properties and the slump in world trade caused the losses of the Credit-Anstalt to rise to twenty million dollars during 1930 an amount larger than its whole capital stock.
This news was announced on May 11, and the Austrian Government at once agreed to place sixteen million dollars at the disposal of the Credit-Anstalt if it could raise a loan of twenty-one million dollars abroad. The Bank for International Settlements was approached, but the French directors on its board insisted that Austria first renounce the customs union with Germany and then submit to international financial control. On June 16 the financial crisis forced the Austrian Cabinet to resign, but the foreign bankers chiefly British and German agreed to extend their short-term loans to Austria for two years. The next day the Bank of England gave Austria a temporary credit of twenty-one million dollars without any guarantees attached and subject to extension. ...
In coming to the aid of Austria, the Bank of England virtually declared war on France in behalf of Germany. Chancellor Briining and his foreign minister, Dr. Curtius, had spent the week-end of June 6 with Ramsay Mac- Donald telling him of their country's desperate plight. German citizens were selling their marks and their Ger- man securities and depositing the proceeds in foreign cur- rency abroad. During the first three weeks of June the Reichsbank lost the equivalent of two hundred and twenty-seven million dollars in gold, or forty-one per cent of its total reserves. The German Government, unable to help Austria and save the customs union which it had counted on to stem the tide of National Socialism, therefore turned to England, which had been lending so much money to Germany that it had a large stake in keeping both that country and Austria solvent.
Because the United States had almost three times as much money as England invested in Germany, President Hoover suddenly proposed a one-year postponement "of all intergovernmental debts, reparations, and relief debts, both principal and interest" to take effect July 1. His faith in the power of undiluted ballyhoo remained unimpaired : he had not consulted a single foreign government in ad- vance. On June 29, the White House announced that all governments except the French had agreed in principle to the proposal, but in the meantime the Federal Reserve Bank of New York had contributed twenty-five million dollars to a short-term loan of one hundred million dollars to the Reichsbank the Banks of England and France and the Bank for International Settlements hav- ing provided the rest. ... STOCK MARKETS at once rose all over the world and the London Spectator commented: "Hope so long deferred has returned like Astrasa to earth. We may well rejoice and thank Heaven that Mr. Hoover has been inspired to his action, for we are escaped, like Job, with the skin of our teeth." The Germans, however, soon discovered that the moratorium saved them only a billion and a half marks, or about as much money as had poured out of the country during the first three weeks of June and about as much as Briining's emergency taxes had yielded. "In spite of Hoover," remarked the liberal Vossische Zeltung of Berlin, "we remain poor as church mice." ... The breakdown of the German banking system reflected the breakdown of German society and these facts prove it There had been sixteen thousand suicides during 1930 and an average of forty-four a day for the past three years. When the Reichswehr needed six thousand new recruits eighty thousand men applied, half of whom had been rendered unfit for service by undernourishment. Half the Berlin school children were getting nothing to eat or drink for breakfast, and in northern Germany one child in five had no bed to sleep in. About sixty million of the sixty-five million people in the country received an average annual income of only two hundred dollars per capita, and the number of bankruptcies during the first six months of 1931 had doubled since the year before.
(My comment: So at a time when wheat could hardly be given away on world exchanges, people in many countries were starving. It was not just Germany; the misery across much of South America was acute, and there was profound poverty in Japan, India and Russia. A growing swell of unemployment was causing suffering in England and the US; the economies of Spain and Italy were impacted severely as well; Spain's government was overthrown and the Rumanian prince was restored during 1930. )
According to the London Times, however, Hoover destroyed the post-war debt structure only in order to preserve the world-wide credit system based on the gold standard: "There is at stake the very basis and maintenance of the international system known as the gold standard, in a world whose members are to-day so linked one with another, so unitedly caught in the vast web of cosmopolitan dealing, that the effect of a collapse of credit at any one of a number of important points can no longer be localized." Events at once confirmed this judgment: the Danat Bank of Berlin, one of the four largest in the country, closed its doors on July 13 following a six-week run. All the other big German banks at once refused to pay more than ten per cent on their deposits, and the Berlin Stock Exchange closed for two days. On July 14 all the banks in Hungary closed for three days and one bank failed in Vienna and another in Latvia.
AUSTRIA had its banking crisis in June, Germany in July. On August 1 the Federal Reserve Bank of New York and the Bank of France each gave a credit of twenty-five million pounds to the Bank of England to enable it to issue more bank-notes and withstand the run on the pound that had immediately followed the run on the mark. Major Walter Elliott, a rising young Conservative member of Parliament, described the atmosphere in London during July with the restraint typical of a British gentleman, on the verge of hysteria: "Last Wednesday men came back from the City to the House of Commons like soldiers coming out of the line. There is no mistaking that atmosphere. Men say little, they sit quiet, they are glad to be at peace. They are not able to accept things around them as real. Reality is out there where they left it, where they will have to go to meet it again,"
Because the Bank of England a private institution, had jeopardized the safety of the pound sterling by unwise loans to Germany, the British Government had to reduce the dole to the unemployed and cut the salaries of all government officials. The Labor Cabinet dutifully set about this task, but the dole cuts it proposed did not go far enough to satisfy the bankers, and the Cabinet split on the issue of meeting the bankers' terms, MacDonald, Snowden, Thomas, and Lord Sankey, favoring acceptance. The Liberal Party took the same line, and since the Labor Government needed Liberal support to exist at all, the entire MacDonald Cabinet resigned on August 24.
ONE RESULT of the overthrow of the Labor Cabinet was that when Gandhi arrived in London to demand complete independence for India at the Second Round Table Conference, he found himself facing a government of imperialists. Another result was that on September 15 the annual maneuvers of the Grand Fleet in the North Sea had to be postponed because the pay reductions ordered by the new Government gave rise to a mutiny which was subsequently laid at the door of the British Secret Service.
Writing on "British Secret Service Secrets" in Crapouillot, an independent monthly published in Paris, Xavier de Hauteclocque, whom we have quoted before, made this statement: "The 'unforeseen' events that recently occurred in the British Navy and that went unpunished were not perhaps absolutely 'unforeseen' by the Conservative Party and its secret assistants. In any case, it seems that 'accidents' like this and the Zinoviev letter will be able to shipwreck any Cabinet that is not oriented in a purely imperialistic direction, in other words, Conservatively." What M. de Hauteclocque meant was that the discontent in the British fleet received encouragement from agents of the Conservative Party, which had controlled the British Intelligence Service ever since 1926 and which was systematically creating a panic before the October elections. In 1924 Conservative agents had staged a similar panic when they made public a forged letter of Zinoviev's in order to spread the idea that the Labor Party was taking money and orders from Moscow.
The Japanese put another interpretation on the mutiny and began acting as if the British Navy no longer stood in the way of their ambitions in Asia. On September 19 their troops marched into Manchuria and seized the city of Mukden on the complaint that one group of Chinese bandits had torn up a short stretch of railway track and that others had shot a Japanese army captain and a military companion who were traveling in civilian clothes on passports that made no mention of their army connections.
This episode marked the triumph of the conservative Seiyukai Party's "positive" policy over the liberal Minseito Party's "negative" policy. Although Premier Shidehara of the Minseito Party had the majority of Parliament and the country behind him, he could not control the army, which, in Japan, is responsible to the Emperor alone. Furthermore, the army had always supported the policy outlined in the famous Tanaka Memorial, a confidential document said to have been submitted to the Emperor by Baron Tanaka, the late Seiyukai leader.
Most governments today are well aware of history and are fighting to prevent matters from evolving as they did then. The web of international lending today could, in some scenarios, collapse as it did then. The South American situation is evolving in a similar fashion today.
1929 -- "Prosperity is Just Around the Corner"
1931 -- "I've Got Five Dollars"
1933 -- "Brother, Can You Spare a Dime?"
Surely the Zimmerman telegram and the sinking of the Lusitania played a part in America's decision to go to war.
As regards the US entering WWI, no doubt it was a mistake of the first order. One can understand how Wilson got into the mess though, if one considers what an advantage the Spanish-American war was for the republicans 19 years prior.
The entire "Banker's War" theory was much in the vogue in the 1930s', when this book was written. Of course after the second World war that theory was pretty much just left alone.
There are other interesting parallels - there were loud and continued claims that the Zimmerman telegram was a fake (when I was a kid some people still argued this point). A lot of people just did not want to believe it. The Zimmerman telegram was the grounds used to argue that in fact German expansiveness was an American problem, and pretty much confounded the isolationists.
I have this book and I have looked for it online before. I was nearly at the point of typing the whole thing up, because I believe the copyright must have expired.
As to whether it was a mistake for the US to get into WWI, I am not sure. The Zimmerman telegram was real, and it is doubtful whether we could have avoided war long term. The reason Mexico did not accept the offer was that they did not believe Germany could offer enough support for them to win, and indeed the offer was extended with the idea that Germany would shortly force England's surrender and therefore be able to give more assistance to the attempt to retake New Mexico and Texas.
I think this book pretty well disproves the idea of a "Bankers War", not to mention the anti-Semitic ravings still popular in some current circles, which are now emerging again in some SA countries. It is very interesting to see the events of the time through the eyes of the people of the time. History tends to be rewritten and rewritten to make it fit into comforting templates.
Deep Regards from the other side of the Moon
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