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STUDY: U.S. Economy Avoided Panic During 1931 European Crisis by...Not Panicking

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Sure, we all tend to idealize the "old days." Carson wasn't as funny as you remember, Coca-Cola with cane sugar really wasn't any healthier than Coca-Cola with corn syrup, and moving crates of vinyl is as bad, if not more of a pain in the ass, than moving a sleeper sofa.

However, a new NBER working paper titled "When the Music Stopped: Transatlantic Contagion During the Financial Crisis of 1931" by Gary Richardson of UC Irvine and Patrick Van Horn of the New College of Florida shows that bankers of years past actually operated with at least a glancing thought as to how their actions might affect the population at large.

From the abstract:

In 1931, a financial crisis began in Austria, struck numerous European nations, forced Britain to abandon the gold standard, and spread across the Atlantic. ... An array of data sources – including memos detailing private conversations between leading bankers the governors of the New York Federal Reserve, articles written by prominent commentators, and financial data drawn from the balance sheets of commercial banks – tell a consistent tale. Banks in New York anticipated events in Europe, prepared for them by accumulating substantial reserves, and during the crisis, continued business as usual. Leading international bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States and Europe. (emphasis mine)

Imagine -- anticipating a crisis...and preparing for it! What kind of saps were these square-minded antiques, anyway? Even worse, a collective decision? Buncha reds.

Anyway, while the paper is available for purchase only, it's a fascinating read -- and the thrills come fast and furious.

Witness businessmen behaving humanely toward one another!

On June 1931, as tensions grew in Germany, New York bankers discussed how to handle their German accounts. On July 3, ten bank presidents told Governor Harrison that they would not restrict withdrawals of German clients. All German accounts would remain open for business. Credit lines would be maintained at least in “their present position and in some cases … unused lines” would be reopened.

On July 15, when the German crisis crescendoed, eleven presidents of New York banks met with Governor Harrison to discuss the situation. The bankers agreed to honor all checks and cable orders to the extent of available credit limits. They also agreed to maintain acceptance lines and accept new bills within existing lines. Finally, they agreed to maintain all deposits in, advances to, and loans for German banks.

Watch in amazement as the American public resists abandoning all sense of logical reality at the mere suggestion of turbulence and remains calm!

On this same day, a front-page story in the New York Times described the New York Fed’s extension of its credit line to the Reichsbank. The credit line of $100 million, originally established on June 25, was extended because “depleted resources” made it “impossible for Germany to repay a huge central bank credit within a short space of time.”2 Articles on this topic – the German crisis and links between the German and United States financial systems – frequently appeared in newspapers. The articles indicate that the public knew of New York’s exposure to the German crisis. The public could have reacted to that information by withdrawing deposits from endangered institutions. The public, however, did not do that.

Relive the wonderment of what it was like when people gave half a s**t about others!

Overall, the narrative record reveals that events in Germany worried bankers in New York, who responded to the crisis by organizing aid for German counterparties and coordinating actions with the Federal Reserve. While some New York banks lost deposits during the German crisis, contemporaries attributed the bulk of this loss to domestic events, rather than to events overseas.

The entire paper is available for download HERE. It's five bucks well-spent
POSITION:  No positions in stocks mentioned.