July 6, 2009

The Weekly Blather July 6, 1930

July 6, 1930 was a Sunday with no Journal, so again a little editorial commentary.

Another couple of surprises about 1930 - these were unexpected based on my previous reading about the Depression.

Availability of good economic and company information: Previously, I tended to think of this period as a kind of Dark Age when it came to investor and managerial access to information. It's therefore surprising to read the Journal day-by-day and realize that economic stats usually seem to be available very promptly - I may be wrong about this, but some seem to come out quicker than they do now, and there are usually good preliminary estimates of the important stuff. When it comes to company information, it's true that things aren't as standardized as they are now (quarterly reports with full financials), but many companies seem to be reporting more quickly than they do today, and often you also get good preliminary estimates toward the end of quarters (possibly prohibited now due to quiet period rules). So, those of you counting on superior computerized information/statistics to save us today might be barking up the wrong tree.

Overcapacity everywhere. One of the things that jumps out at me the most is that every day there seem to be three or four stories about different industries trying to cut production down to match demand using desperate measures such as industrywide cooperatives, production holidays and curtailment, and buying and segregating surplus. Now, I understand how this would happen after the economy had spiralled down to a really serious extent, but as measured by most stats this really hadn't happened yet at this point. So, it's an interesting question to me how this chronic problem of overcapacity in many industries at once developed. Some of it can be explained by government action (ex. the Farm Board for agricultural commodities), but it happened in many industies that weren't government-”supported,” such as steel and livestock.


  1. I was thinking about this issue with information. I wonder how accurate the information might be? Wouldn't the comparative lack of regulatory effort, not just rules, mean greater capacity to fudge the numbers without the public ever knowing?

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  3. "So, it's an interesting question to me how this chronic problem of overcapacity in many industries at once developed."

    This "overcapacity in many industries at once" is easily explained by the only economic model that truly accounts for boom and bust cycle, The Austrian Business Cycle Theory, as explained by Ludwig von Mises BEFORE the Great Depression occurred.

    Credit expansion via inflation by the central bank causes artificially low interest rates, which fools entrepreneurs and corporations into believing demand-driven profitability is greater than it truly is (or will be once the inflation is stopped), which causes misallocation of money and resources towards expansion of businesses that are unsustainable once the expansionary money policy is reigned in.

    See mises.org for the details.

  4. No, the Farm Board was a response to overproduction in the 1920's. Briefly, during the war agriculture was good, but the dollar was too strong during the 1920's compared to other currencies (read Lords of Finance) for the US to expand its exports. Further, agriculture was just starting its revolution (tractors). So farming was depressed during the 1920's. When the New Deal came in there was a twofold recognition: we had too many farmers and farmers needed some way to control production. Those two themes underlie much of agricultural history during the 1930's

    Note there are attempts to voluntarily reduce production in some crops, but the farmers suffer the "free rider" problem. Only the government could enforce marketing cartels for fruits and vegetables and marketing quotas for tobacco, peanuts, and wheat.

  5. "Overproduction in the 1920's," both in agriculture and in industry, was a direct result of the Fed's expanding money supply.

    See today's article: When Stimulus Does Not Stimulate

  6. Regarding the notation about overproduction - here is an item about Alcoa from 07-08-09, quoted from Yahoo!Finance:

    Alcoa, the first of the Dow Jones Industrial Average companies to post results and a bellwether of industrial health, has scaled back its production by about 20 percent. It has undertaken a campaign to cut costs and raise cash, announcing 13,500 job cuts and the planned sale of four business units earlier this year.

    Timing is eerie.

  7. Eldon is speakings sense.

    Have a read of: Americas Great Depression by Rothbard.

    Paints a very different story compared with the conventional historical writings of this period, laying the blame at he hands of the Fed and the Govt. The level of intervention was stunning - both causing and prolonging the depression.

    The Fed put the "Great" into the dpression.

    Should be able to pick it up for a few quid 2nd hand on Amazon.