Tuesday, September 22, 1931: Dow 110.83 -0.91 (0.8%)

Note: Sorry for the delay in posting, but as you'll see this day was a pretty eventful one with about double the normal quota of news, and I didn't want to skimp on the coverage because of the significance of the events. Also, I'd put this day as a whole in the Strangely Familiar Dept., although to do so you'll have to apply the [US now = Great Britain then] mapping that I proposed over a year ago:
I'm ashamed to admit ... it hadn't occurred to me that while the current situation might bear some resemblance to 1930, the countries might have to be shuffled around to really make things correspond ... Well, if China now is us then, then who then are we now? Let's see ... proud owner of the world's reserve currency franchise ... running sizable merchandise trade deficits ... I think I got it! (Hint: Baring Attire).
(Baring Attire was, of course, an anagram for Great Britain.) When you apply that substitution, the current brouhaha over the dollar's dramatic decline does have a familar feel ...

Momentous Event Followed by Curiously Reassuring Commentary Dept.:

Britain abandoned the gold standard for at least 6 months, suspending its legal commitment to sell gold bullion in exchange for sterling "to any person who makes demand" at the Bank of England; also raised discount rate to 6% from 4 1/2%. Sterling broke below $4 (from $4.85 on Saturday), but rallied to close at $4.33. Other currencies fluctuated widely, but with little actual trading; currency trading was suspended at many foreign centers. Most stock markets worldwide were closed, including those in London, Berlin, most of Europe, and Tokyo; markets remained open in NY, Paris and Vienna. Stocks in NY and Paris suffered "drastic liquidation"; NY rallied off early lows, but Paris market remained very weak, with leading shares off 12% to 15% and brokers limiting sales to 5% of holdings. Paris officials discussed closing the stock exchange there, indicating “possibility that the NY exchanges might have to bear the brunt of international liquidation.” Stock exchanges in Toronto and Montreal remained open, but restricted all trades to be at or above Saturday's close and prohibited short sales; this “had the effect of stagnating business.” London saw a small amount of stock trading in the “unofficial market held in the street” Monday; prices rose appreciably from Saturday's close. British banks in Paris temporarily stopped cashing checks drawn on London banks. Swiss banks in Geneva were “refraining from all foreign dealings.”

"Now that Britain's heroic but futile effort to maintain the pre-war value of the pound has come to a climax, the future of many other exchanges and even of the gold standard itself hangs in the balance." Other currencies "have been widely influenced in the past by sterling." Current British action seen as a temporary expedient to give Britain “a breathing spell” to put its “economic and political affairs ... in order.” However, next steps, including possible tariff and likelihood of eventual return to gold standard, are uncertain. Devaluation of sterling now seen by most as inevitable, though no one can yet say to what level and a minority still believes Britain should maintain sterling's value in order to keep its “primacy as a world money center.” "Sterling will probably be allowed to find its natural level, without artificial influence"; bankers believe sterling is unlikely to fall much below $4 unless “unduly depressed by speculators.” Britain may get some benefits as well as disadvantages from devaluation; NY bankers contrasted England's long efforts to maintain sterling's value with past devaluations by France, Italy, and many other countries, by which they reduced their internal debt burden and eventually brought gold back. Immediate effect on budget balance seen as adverse, but long-term effect probably favorable. Devaluation would cause some inflation, but “there is in England considerable opinion that inflation would be helpful,” and may even be necessary for economic recovery. Industrial leaders believe the pound should be reestablished substantially below the old value, arguing benefits to British industry won't be felt unless pound is below $4.40. International currency conference seen as inevitable; "out of such a conference may come a real solution to the gold problem which has finally broken history's most enduring currency."

British Parliament was in session Monday to ratify the govt. action taken Sunday. A bill was introduced for suspension of the gold standard, with passage assured. Chancellor Snowden said there would be no restriction on import or export of gold. Labor said it would not oppose the bill provided govt. answered questions on its operation. The House of Commons was quiet, with the recent “militant noisiness of the labor opposition” not in evidence. Editorial reaction in the British press was “virtually unanimous in calling the temporary abandonment of the gold standard one of the greatest blessings that could befall the country”; action seen stopping drain of gold from Britain and leading to improved business and higher security prices.

Editorial generally approving of the British action; "Protection of its remaining stock of gold from attack by apprehensive bankers in other countries is not only Britain's obvious duty to herself, but the measure best calculated to halt a disorderly and demoralizing transfer of gold and credits which was lately assuming the character of an international panic. Stripped of its dramatic and sentimental aspects, it is only what has been done before in emergencies." Action may persuade the US and France "to a more actively helpful cooperation for world stability then they have yet extended." Too early to say if measure will lead to revaluation of the pound "which it unavoidably suggests," but in any case reduction will "almost certainly be nothing like as severe" as those already performed on leading European currencies. Notes reassuring declaration by British govt. that "it has no intention of impairing ... the integrity of British obligations abroad"; since these are mostly payable in foreign currency, they "will presumably be so met as they mature."

Washington officials positive; “foresaw the action as probably having a salutary effect on British finances and trade after the first shock of the announcement had passed,” while not attempting “to minimize the momentous character of the step.” More intriguingly, officials saw the British action bringing a solution of the international debt problem nearer, since it clearly demonstrated the interdependence of financial conditions in different countries; while the British budget crisis and “recent naval troubles” contributed to the crisis, the main cause was London's inability to withdraw short-term loans from Germany after the crisis there; this in turn caused nervousness and capital flight from London. Therefore, the British situation indicates the need to overcome “political opinions in France and the US” and reach a “final settlement of the problem of reparations and inter-govt. debt.” US officials knew some “drastic action” would be needed at least 48 hours before the British announcement, but decided against the risky and uncertain alternative of “coming to British support in a large way, such as by underwriting her foreign obligations.” Having decided the situation would be handled by British action, US officials then “put up to bankers in NY the working out of means to cushion the effect here,” continuing meetings with them until late Sunday.

J.P. Morgan, "smiling and smoking a pipe," issued statement calling British action "a hopeful and not a discouraging event, and one which brings the great work of the government much nearer to completion."

Bank of France Gov. Moret says "France has no reason to become panic stricken. Her money is solid and her gold and dollar credits in NY render the franc absolutely unattackable." Points out recent French credits to England are repayable in francs. French bankers refuted official British statement charging major withdrawals of foreign capital from London, insisting this was true in June-July, but that recent withdrawals were mostly British.

There was some confusion on whether Britain would receive additional aid from the US and France. French reports stated that additional credits would be extended, but NY bankers said this was premature. Informed sources said French PM Laval offered Britain a new $156M credit on Friday when Chancellor Snowden called him and reported the gravity of the situation. However, Snowden declined temporarily, wishing for a larger credit with US participation.

Cotton and wheat prices rose sharply in Liverpool; some believe British decision to suspend gold standard will induce consumers to buy in anticipation of higher prices; London rubber and metal markets also advanced.

Canadian PM Bennett announced Canadian govt. proposed to maintain gold standard. Canada will ship $500,000 in gold to NY; current reserves are $70M, or 52.4% of notes in circulation (vs. 33.2% in Sept. 1929). Sir H. Holt, Bank of Canada pres., said Canada shouldn't be affected adversely by British action; Sir C. Gordon, Bank of Montreal pres., said he didn't expect any drastic consequences for Canada; T. MacAuley, Sun Life of Canada pres., said immediate effect might be disturbing but long-range one will be good.

Japanese financial leaders say effect of British financial crisis on Japan will be slight since she has almost no short-term credits outstanding abroad, though US reaction to the situation may have indirect effect.

Effect of sterling crisis on German economy “doubtless will be great,” but immediate danger to the mark isn't anticipated since current reserves and the existing agreement to maintain short-term loans should suffice for defense of the currency. “All authoritative circles have vigorously rejected the idea that Germany should abolish the present relations between the mark and gold.”

Argentina shipped another $5M in gold to the US yesterday, making a total of $25M shipped to help pay $50M in notes maturing Oct. 1.

NY banking scuttlebutt on the British crisis:

NY bankers “view the situation calmly”; note suspension of gold payments is not unprecedented in emergencies, and are apparently unanimous that “this was the wisest course for England under the circumstances.” At the same time, “none seeks to minimize the far-reaching adjustment that inevitably must follow in international trade and credit.”

NY bankers “see silver lining” in British action, particularly as regards position of NY banks; see “a tremendous opportunity for NY in financial leadership” as the world will now “look to America as the principal safe repository for banking funds and investments.” Since NY “is now the principal financial center on a gold basis, there is no reason to anticipate that foreigners will dump securities on this market. On the contrary, the present situation should now invite buying in American securities from all over the world.”

NY banking position seen as strong; banks have protected themselves over the past few weeks by withdrawing most balances from London and protecting the rest by selling forward sterling, so stand to lose very little by depreciation of sterling; situation is therefore different from recent German crisis when banks were unable to get out of short-term loans there. Paris banks, by contrast, are believed to still have large amounts in London. NY banks also have over $100M of “surplus reserves” with the Fed. Reserve, which is enough to expand loans and deposits b $1B; “such funds could be used, if necessary, to keep financial markets orderly.” “No doubt is felt as to England” fulfilling its obligations in gold in the US, including the recent US credits, which are payable in dollars.

NY bankers are "strongly opposed" to closing of the NYSE "under any circumstances"; believe extensive decline in securities over past 2 years has made "technical position of collateral underlying loans very strong"; with brokers' loans down to record low of $1.3B, "the NY banks can safely undertake to take care of the Stock Exchange situation."

"Bankers in a position to know declared that no banking pool to support stocks had been formed." However, before the market open officials of leading banks assured the NYSE they "were inclined to be lenient" on calling margin loans.

Possible inability of England to keep supporting sterling "has been hanging over the market for some time, causing general nervousness" worldwide.

England has "temporarily exhausted her liquid resources available for support of sterling" due to heavy withdrawals of foreign funds, estimated at 200M sterling since mid-July. It's believed England has virtually used up both the $250M and $400M US-French credits in buying spot and future sterling for support operations.

Assorted historical stuff:

Pres. Hoover addressed American Legion convention: "The world is passing through a great depression fraught with grueling daily emergencies alike to men and to governments." Attributes current gravity of depression to European situation, which in turn was caused by dislocations due to the war. "Our economic strength is such that we would have recovered long since but for these forces from abroad. Recovery of the world now rests ... in no small degree" upon the US. Warns the US govt. can't sustain additional spending without "grave risks"; asks veterans to defer demands. Says taxation of rich no solution; even if "taxed to the point of diminishing returns ... the deficit ... would not be covered." Accepts offer of Legion to help with relief for this winter, but asks for a "greater service" in maintaining stability of the US govt. by preventing "additional burdens on the government from any quarter whatsoever." Reception generally favorable, though shout of "we want beer" broke out as Hoover turned to leave, spreading "throughout the hall in a tremendous roar. ... Mr. Hoover ... appeared to take no notice of the beer cry."

A number of legislators are expected to try to enact export subsidy plans when the next Congress meets; possible plans include the "equalization fee" and the "export debenture." However, little possibility is seen of the proposals becoming law, as the Administration is firmly opposed to "measures which are intended to force products onto world markets already depressed."

War Dept. says will seek no increase in any part of the army, in line with Pres. Hoover's austerity policy.

Australian govt. debt as of June 30, 1931 was $8.041B (total Commonwealth and state) [note: a rather staggering number, considering the US, with a population about 20 times larger, had total Federal, state and local govt. debt of about $30B].

State Dept. says friendly toward any feasible plan to limit armament; ordered Hugh Wilson to participate in League of Nations discussion of proposal to halt all arms construction until disarmament conference.

State Dept. reports Japan-China difficulties have become more serious in past couple of days; widespread Japanese military movements now confirmed; Japanese army has seized strategic locations. "On the other hand, it has been confirmed through diplomatic channels that the Japanese cabinet has moved to stop hostilities." Chinese govt. at Nanking to lodge protest with League of Nations.

US Consulate in Mexico says many US workers and technicians are leaving Mexico for the US due to new Mexican labor code requiring 90% of all employees to be Mexican citizens.

Census of India reports population of 350.4M, of which Hindus number 238.3M and Muslims 77.7M [note: I assume this includes Pakistan].

US employees accustomed to bathing in the fresh waters of Gatun Lake, part of the Panama Canal, got a scare recently when a man-eating shark was caught in the lake. Lock operators speculated the sharks could have entered the lake from either ocean by closely following behind ships.

[Note: Sheer Genius Dept.] NY City's fire commission is considering abolishing sirens on all fire engines at night to avoid disturbing the sleep of thousands. As a substitute, the engines would throw powerful beams of lights on the streets ahead to stop traffic.

While London may be figuratively darkened by "lowering clouds of anxiety," the city at night is now in a "blaze of glory," thanks to the International Illumination Congress now taking place there; British electric cos. are staging the "greatest lighting exhibition ever. ... The joyous reaction of the British public ...is a cogent argument for the increased use of electricity for other than strictly utilitarian purposes." London may repeat the history of NY's Great White Way, where competitive movie advertising "has made that crooked street blaze anew" and created an "orgy of light."

Market commentary:

Market wrap: Stock market opened under "bewildered" conditions, with talk of suspending trading as in London and Berlin. "Drastic liquidation" broke out at the open, with 1.1M shares traded in first half-hour and many new lows, though conditions remained "fairly orderly" (total volume for the day was 4.4M). However, impressive support developed after the initial selling had been absorbed; brisk rallying followed, with sharp advances off the lows in leading shares; heavy short covering by leading bears including Bernard E. Smith reported; improvement was largely maintained to the close, despite some late setbacks. All classes of bonds fell after England's abandonment of the gold standard and the closing of many foreign stock markets. Foreign bonds fell sharply, particularly those payable in gold in the US. "The depreciation of fixed-income ... securities from countries and corporations in all parts of the world was enormous." Domestic rail, industrial and utility bonds averages hit new yearly lows, with the Dow average of 40 corp. bonds down 1.27 to 88.80, although there was some rallying in late trading. "Scared selling carried the best quality issues down with the weak," though US govts. resisted the general decline and closed with only small losses. Grains hit new lows, with wheat futures plunging over 3 1/2 cents; however, later rally recovered over 2 cents of the loss. Cotton fell to new lows in spite of rally in British cotton market. Copper buying small, price still at 7 cents/pound. Cocoa plunged to new record low. However, silver was strong, rising 1 1/2 cents to 29 1/4 [note: may be due to anticipation of Britain adopting monetary silver].

Dow industrial average closed at a new bear market low; there were no new yearly highs and 482 new lows.

Stocks have recently "entered the fifth period of convulsive liquidation" since Sept. 1929. The dramatic swings in the Dow so far include: decline from 381 to 198 (Sept. - Nov. 1929); rally to 294 (Apr. 1930); decline to 211 (June 1930); rally to 245 (Sept. 1930); decline to 157 (Dec. 1930); rally to 194 (Feb. 1931); decline to 121 (June 1931); rally to 156 (June 1931); decline to 111 (Sept. 1931). Declines through 1930 attributed mainly to domestic business downturn; this was supplemented by the numerous bank failures in Dec. 1930, and most recently by the British difficulties. However, given that "the news from London over the week-end constituted one of the severest shocks which the market has been called upon to withstand during this epochal readjustment," resistance shown by leading shares indicated "the world-wide economic unsettlement had been largely discounted by the decline in stock values over the last two years, which has been by far the most sweeping on record. With the worst phases of the British situation is now public ... strong groundwork has been prepared marketwise for an eventual upturn in anticipation of international improvement."

"Brokerage fraternity confused" after recent "rapid march of events in the finances of the world ... but all hands agree that there can hardly be any more bad news that can match with what the market has had to stand in past months. Wall Street believes that the big inflation in production not only has been eliminated, but that in many instances there are actual possibilities of the pendulum swinging too far in the other direction."

Wall Street opinion on the British action seemed to improve through the day, as reaction in Britain was positive and opinion was expressed that the action would end the recent severe strain on US financial markets from efforts to protect sterling.

Margin calls have reportedly been relatively light in the past couple of weeks in spite of the severe market decline.

Heavy foreign selling of US securities has gone on for some time; selling from Britain and Holland has been "continuous, particularly in the bond market."

British capital has been "jolted severely by its worldwide investments," particularly in S. American govt., rail and industrial issues; these have been sinking steadily.

While AT&T may not cover its dividend in Q3, "undoubtedly, the management ... would not consider any revision until it had been demonstrated clearly that it ... would not be earned by a fair margin for some time."

Former Sec. of State Kellogg returns from abroad; says "we are certainly not going to correct this depression by legislation"; calls for control of spending at all levels of govt.; blames depression on "heavy burden of taxation, undue inflation and the high price of commodities."

H. Doherty, Cities Services pres., says oil business could have ridden out the economic storm easily if sane methods of production had been followed; repeated earlier recommendation for unit (cooperative) development of each oil area.

M. Holland of the Nat'l. Research Council urges more extensive use of scientific research by industrial cos. as means of hastening business recovery.

E. Loomis, Lehigh Valley Rwy. pres., criticizes GE pres. Swope's proposal for stabilization of industry by govt. supervision as too drastic; asks "why Mr. Swope should urge that we engage in a frankly socialist experiment at a time when the state to which England has been brought by a similar indulgence in paternalism, is so prominently in the public eye." Says while US business men are hard-pressed by the depression, he cannot believe they are ready to give up and admit they cannot meet the situation.

Economic news and individual company reports:

Editorial praising "courageous" decision by the NYSE to remain open; this "was right, as the results already abundantly prove. ... Fortunately, the Exchange governors held to their fixed principal that the Exchange is the place for men to express their minds freely and publicly ... The result, so far as Monday's transactions register it, is a judgment from American financiers and investors that the British departure from a complete gold standard is something to which the world can adjust itself with comparative ease." NYSE pres. Whitney warned that in view of the "grave ... emergency created by the suspension of gold payments in England, the governing committee resolved that short selling" at this time would "tend to bring ... demoralization in which prices would not fairly reflect market values," and therefore would violate the NYSE constitution. Announced NYSE would "require all members to report in detail daily, beginning today, all short positions carried and for whose account." Following the NYSE warning against short selling, many lenders of stock [to short sellers] began calling in the certificates, leading to "a squeezing of shorts" that sent some issues "skyrocketing," particularly among the rails. However, "it soon became evident that this calling of stock loans did not meet with the approval of officials and the practice was promptly terminated."

M. Steuer, counsel for Bank of US depositors, asked Gov. Roosevelt's approval to sue NY State to recover depositors' losses on grounds of misfeasance on part of Banking Supt. Broderick in not closing the bank in June 1930. Attorney for Bank of US stockholders urges Broderick to delay action assessing stockholders for depositors' losses, alleging fraud in stock sales to “small trade people.”

Bank of Pittsburgh, N.A. closed; deposits $47M. Highland Nat'l. Bank closed; deposits $3.9M. Franklin Savings & Trust closed; deposits $2.8M. Capital Trust of Schenectady closed; deposits $1.8M. NYSE house of Schuyler, Chadwick & Burnham suspended for insolvency.

Nat'l. Surety Co. reports embezzlements by employees up over 17% in past 18 months.

Texas Railroad Commission's new order expected to reduce East Texas oil production from recent peak of 432,150 barrels/day to about 360,000; in near future, Commission may further reduce allowable production per well and limit new drilling, which has continued unabated. East Texas oil now at 68 cents/barrel.

ICC now hearing final arguments on 15% rail freight rate increase; decision expected around third week of Oct.

Editorial approvingly noting attacks by Maryland Gov. Ritchie [a Democrat] against “govt. ownership-operation theories” for public utilities advanced by Sen. Norris and Gov. Pinchot [both Progressive Republicans]. “Here at least there is no Democratic-Progressive alliance.”

Cuban Treasury Sec. assures Cuba will meet all obligations in spite of crisis.

Jersey City postponed sale of $4.4M in bonds scheduled for today "due to unsettled conditions in securities markets."

Quebec finances highly satisfactory; net funded debt in 1930 was $54.0M, up only 9.6% from 1921; has maintained an annual surplus of ordinary revenues over ordinary expenditures for the past 33 years.

NYSE seat sold for $168,000, down $17,000 from previous sale and lowest price since 1926.

Companies reporting decent earnings: Kansas City Power & Light, Montreal Light Heat & Power.

Jokes:

"So your husband tried to get a government post? What is he doing now?" "Nothing. He got the post."