Wednesday, April 6, 2011

History or Hysteria: When Did "the Great Depression" Begin?

No mythology faces as many problems as the folktale of The Great Depression. The Austrian economist, Ludwig von Mises, pointed out in Human Action that capitalists and socialists usually agree on the raw data, but then disagree on what the facts mean. In 1929, the New York Stock Exchange recorded dramatic price collapses on October 24 ("Black Thursday") and October 29 ("Black Tuesday"). What is missing is a connection between the NYSE of October 1929 and the banks of Detroit in February 1933. It was there, in Detroit, on February 14, 1933, 40 months later, and 600 miles away, that the bank failures of the Great Depression began.

To be sure, bank failures were common in the years before 1929-1933 – and so were bank openings. From 1884 to 1921, the number of banks had sextupled from 5000 to 30,000. Not only were these generally small banks – some capitalized near the minimum $25,000 – but after 1921, the new operations were often branches. The federal Comptroller of the Currency had opened the door to allow city banks to compete in towns and villages. From that point, bank failures increased, as is to be expected from increased competition. In January 1933, it seemed that the summer of 1931 had been the lowest point possible and that a recovery was unfolding. 
Depression-Era scrip issued by the City of Detroit
against property taxes due

            Speaking to a United Press reporter in Dearborn, on February 1, 1933, Henry Ford called the period 1923-1929 “the real depression.” At that time, two holding companies dominated finance in Detroit. One was the Detroit Bankers Company Group. The other was the Union Guardian Group, colloquially called “The Ford Group.” When the Union Guardian Group experienced pressure from withdrawals, it turned to the federal government for a loan. However, the Reconstruction Finance Corporation required that the Fords subordinate $7 million that the banks owed to them, which Henry Ford refused to do. President Herbert Hoover set up a meeting with Ford, Arthur Ballantine (Under Secretary of Treasury) and Roy D. Chapin (Secretary of Commerce). Chapin was a former Olds executive and co-founder of the Hudson Motor Car Company. He appealed to Ford as a fellow manufacturer. Ford replied that Hudson stock was traded on the NYSE, which Ford’s was not, and that a washout of the banking industry seemed inevitable. Chapin replied that if people do not have money to buy cars, Ford was in for hard times himself. Ford said that he felt young enough to start over from scratch. Ford said that everyone else ought to be prepared to get up a little earlier and work a little harder. He also said that he would withdraw his $25 million from the banks in the morning. He did not get to do that.


The next morning, February 14, 1933, Michigan’s governor, William Comstock, declared a banking holiday. The proclamation had been signed at 1:00 AM, published, and delivered to bankers when they arrived for the start of the business day. Two weeks later, outgoing President Hoover hesitated to declare a national bank holiday, so the newly-inaugurated President Roosevelt did just that. On March 21, 1933, the Michigan Legislature passed the McNitt-Green bill, granting the governor “dictatorial powers” over banks. Unlike Hitler, Mussolini, and Stalin – to whom he was favorably compared by newspapers in those troubled times – Gov. Comstock had modest goals and eventually declined further powers to control the insurance industry as well.

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