No Journal was published Sunday, July 12, 1931. Another special reader response edition - a belated reply to Onlooker, who wrote a week or two ago asking if he was accurate in remembering reading about big companies building up cash earlier in the blog, since we're hearing similar things today. In fact, the same thing had struck me, along with another strangely familiar theme - the idea that apparently became widespread in the 1920's that the business cycle had been tamed to some extent thanks to better economic information and policy (today commonly referred to as The Great Moderation). A sampling of the latter item first:
Jan. 2, 1931: C. Snyder of Fed. Reserve NY: Contrary to "phantasies of a 'new era' of unending prosperity so widely prevalent but little more than a year ago," it's clear that the business cycle is still with us "in all its force."
Mar. 2, 1931: W. Muller, NY Curb Exchange pres., says 1930 left lasting impression on financial world, refuting conclusively the "plateau of prosperity" theory that had overtaken the "business cycle" theory in 1928-29. Even in early 1930, stubborn belief persisted that the business cycle had been defeated, as "organized and determined" multi-billion effort was exerted by business to "dissipate by intervention the already existing forces of depression."
June 25, 1931: NYSE pres. R. Whitney reviews events of past year. ... After the 1919-22 depression, much study was devoted to statistical and economic research, particularly toward understanding of the business cycle. "Unfortunately the long period of great prosperity from 1925 to 1929 persuaded many ... that the business cycle had been definitely abolished, and that it had become possible steadily to increase general prosperity indefinitely, without the danger of serious depressions."
Feb. 20, 2004: B. Bernanke. One of the most striking features of the economic landscape over the past twenty years or so has been a substantial decline in macroeconomic volatility. [What the .... how'd that one get in there? Must be some sort of virus ...]
And a sampling of the strong balance sheet stories:
Jan. 20, 1931: K. Hogate, VP Dow, Jones & Co., decries "fetish of a corporation surplus" leading to current accumulation of billions of cash on corporate balance sheets which are "passively at work, but have no velocity."
Jan. 20, 1931: While many annual reports will show considerably lower earnings, balance sheets are generally as strong as ever, with better cash and working capital positions.
Mar. 3, 1931: Corporate balance sheets are much stronger than in the depression ten years ago; many were borrowing large sums at 6%-7% then; now funds are available at 2% but debt is much lower.
Mar. 28, 1931: In spite of generally poor 1930 earnings, a number of large industrials maintained very strong balance sheets with net quick assets exceeding total obligations, including Texas Corp., Chrysler, and Allis Chalmers.
Apr. 14, 1931: GM strengthened balance sheet in 1930 in spite of lower earnings; working capital rose $29.7M to $281.0M; current ratio rose 4.35 from 3.13, highest since 1924.
Apr. 18, 1931: Some economists believe generally strong corporate balance sheets are postponing wage and dividend and adjustments that must come before a recovery.
May 30, 1931: Despite poor business conditions, balance sheets of 150 leading corporations held up well in 1930; total cash and equivalents ended the year barely changed at $2.967B vs. $2.968B; net current assets of $7.353B were down 4%.
What we are to make of all this I'm not sure - the two patterns seem clear enough to possibly be significant but the causes are of course hard to nail down. An intriguing idea about the Great Moderation can be found at Steve Keen's excellent site - a mathematical model that reproduces the pattern pretty darn well. I'd also hazard my own wild guess that a long period of asset appreciation and easy credit might moderate downturns since assets and borrowing can be tapped by consumers to maintain spending when downturns come in the “real economy.” As to the accumulation of corporate cash, could it be that the Great Moderation period leads to this by reducing the intensity of downturns that would normally drain corporate treasuries? Food for thought ...
Finally, a tip of the hat to longtime Yankee and Giants announcer Bob Sheppard, who died yesterday - I'm a Mets fan but always enjoyed hearing the “Voice of God.” For those who think of this blog as ancient history, note that Bob was almost 21 years old on this day in 1931 (he was born on Oct. 20, 1910). He continued announcing Yankee games until 2007, and, even in his 90's, would regularly beat the crowd out of Yankee Stadium - an astounding feat considering that unlike the crowd, he had to stay until the final out!