As I mentioned I am interested in the word sequencing. It is the order in which things progress through cycle in particular that have me fascinated. How does the money flow from good to bad and where does it go? I like to say that if the world was a poker game and everyone started playing by the end of the game Warren Buffet would be grinning and holding all the chips. He is simply a better investor than everyone else. This is what big business was doing at the time of the Great Depression as the new middle class had been rich, but they had taken their money and bought things from big biz, many using leverage, and now the middle class found itself broke. Where we left off last week was the sequence of money having to be paid back now reached beyond the consumer to the second participant in a credit transaction, the banker. The banker had offered credit, and loans had been paid back with regularity for almost a decade and now the banks had overextended and created bad credit risks. They loaned out money that could not be paid back. The bad loans were now their problem. They were also complicit in this failure, very complicit.
Again, I want to give credit where credit is due to Edward Robb Ellis and his book A Nation in Torment. I doubt he expected ole C Thomas would pick up his storytelling 54 years after writing his book, but I am a lot of things but current isn’t one of them. He tells the story about how shaky the banking sector was before the crash. Francesco Ferrari was a banker, that ran the City Trust Company a very large New York Bank. Ferrari was showman, flashy, wore a fedora, but what he wasn’t was much of a banker. His bank was weakly structured, engaged in poor practices, and committed illegalities including bribing Frank Warder. He was the superintendent of banks and was supposed to be supervising them and their practices, but he and Ferrari were close and Warder failed to do his job.
On January 30, 1929, a full 9 months before the crash Ferrari developed a bellyache that turned into an attack of appendicitis. If you are familiar with anyone that has fought the appendix and looked it in the eye know that they are the true superheroes of society along with firemen and teachers. Well, ole Ferrari was not a superhero, and he died two days later. His bank died ten days later as rumors of the improper use of funds appeared after his death and the bank failed. 16,936 depositors took it on the chin with their $6,500,000 frozen. This left the remains of the bank to Warder himself, the superintendent, who was extremely unsure of what to do. He got a passport and was ready to split for Europe when the authorities put the kibosh on that idea. He was fined and ended up doing time in Sing Sing for fraud. This was all before the crash but you can see how lax banking laws were and fortunately the man that prosecuted Warder, a man by the name of Robert Moses, was able to help identify problems in the banking system before they started. It was to be of little help, because then Governor of New York Franklin D. Roosevelt had a personal grudge against Moses for not giving his friend a political appointment. Roosevelt, who would become the ugliest stain against the Constitution in history, knew about the banking crisis and did nothing. Wonderful governing. This from Ellis, “The governor asked his commissioners to suggest banking reforms before the state legislature met in its regular session in January, 1930. And Roosevelt added weakly, “I hope that the banking commission will tighten up a bit on the functioning of directors and officers of banks.” This was akin to asking the foxes not to eat the hens.”
After the disgrace of Frank Warder, Roosevelt himself, still as governor mind you, appointed the next state bank superintendent, Jospeh Broderick. This was July 1, 1929, still before the crash. 12 days later Broderick and 100 regulators reviewed the actions of the Bank of the United States. It was a very large bank with almost 500,000 depositors and they found utter corruption. The bank’s founder Bernard Marcus and his number two Saul Singer were, if I can simplify this, using affiliates to circumvent rules to take depositor money to buy and run up the stock for their own benefit. They also used this scheme to use depositor funds to buy real estate. Broderick to his credit denounced the operation and then did nothing. Despite legally being mandated to review this bank twice a year he did nothing for the next 12 months with full knowledge that fraud was taking place. Marcus and Singer were still producing financials that were as rosy as the cheeks of Judy Garland. But in December 1930, the bank and its fabrication began to unwind, like a yogi exiting Ardha- Matsyendrasana. On December 10th a bank run started and $2M was withdrawn in one day. The next day Broderick closed the bank and the banking crisis of the 1930s began. Governments, businesses, and small depositors had funds frozen literally overnight.
From Ellis about Socialist leader Norman Thomas, “Norman Thomas pointed out that the Bank of the United States had been chartered by the state of New York, charged that the state banking department was under suspicion and declared that Governor Roosevelt had done nothing to avert the fall of the bank despite warnings that it was weak.” The ensuing panic led to protests and arrests and finally well into 1932 the depositors received about 90% of their money back. 1,326 banks failed in 1930, but this was the one that broke the trust of the American people with banking, and FDR took notice.
This was all before the FDIC guaranteed depositors their first $250,000, which was $100K until recently. During the fall of Silicon Valley Bank there were many VCs that were well in excess of this $250k amount, and rather than let them take their medicine the government bailed them out and guaranteed their savings. We don’t let anyone fail in this country whether it be a hedge fund that can’t read the FDIC notice on the wall at every bank or a 5-year-old soccer player whose team loses 10-0. Why did the Treasury Secretary say that not all banks would be guaranteed this advantage? Many of these VCs and Silicon Valley depositors were large campaign donators and thus were given special privilege. Hysterical types will say that we needed to guarantee all deposits, but that is only to preserve the current system. The system that benefits them. Those depositors made a choice, but the poor person earning minimum wage or living on a fixed income did not as they watched inflation steal away their money. It might be time to stop playing favorites and deal with the pain as they did in the Great Depression.
M2 is the common data point used by the Federal Reserve to measure how much money is in the system. Nick Gerli reports that there have only been 5 instances where M2 money supply has fallen by at least 2%. 1878,1893, 1921, 1931-1933 and July 2022- Feb 2024. Each time a Depression followed by double digit unemployment rates.
That last set of dates is a bit scary, but we are looking at the 4th set of numbers today. Banks make loans and loans are money creation into the system. As banks failed the money supply dried up. The ability to pay back loans dried up and as the money left the banking system to find itself under the mattresses; the bank’s ability to make loans also was reduced. This was a terrible thing for business as businesses couldn’t get more financing and farmers couldn’t get more financing, and loans were called, and people closed their businesses and lost their farms and banks were left with assets that weren’t able to pay their notes and the banks were the next to close. This series of events wore on people. As people lost their money in the markets and then the banks there was a tangible change in psychology. Were the family farms of the 1930s were the commercial real estate of today or the houses of the great financial crisis?
In the cities unemployment soared into the 20% range. In rural areas, people just drifted from town to town on the railroads or just walked from town to town looking for some work, any work. Unlike today, there was a money shortage and money velocity were stagnant until FDR took office and destroyed the Constitution mostly by executive order. Before we get further into the sequence, we need to go back just a couple steps to look at what else led to the banks failing. It wasn’t just corrupt bankers and irresponsible big businesses. It was government intervention long before FDR came to the spending rescue.
This from Investopedia, “The total money supply grew by $28 billion, a 61.8% increase between 1921 and 1928. Bank deposits increased by 51.1%, savings and loan shares rose by 224.3%, and net life insurance policy reserves jumped by 113.8%. All this occurred after the Federal Reserve cut required reserves to 3% in 1917. Gains in gold reserves via the Treasury and Fed were only $1.16 billion.
The Fed instigated the rapid expansion that preceded the collapse by increasing the money supply and keeping the federal funds interest rate low during the decade. Much of the surplus money supply growth inflated the stock market and real estate bubbles.
The Fed took the opposite course by cutting the money supply by nearly a third after the bubbles burst and the market crashed. This reduction caused severe liquidity problems for many small banks and choked off hopes for a quick recovery.”
Increased money supply, low interest rates, stock and real estate bubbles sure seem familiar. Now we have seen the money supply contract over 2% for the first time since this very scenario 90 years ago. The banks almost failed during the Silicon Valley Bank debacle but instead of the 1930s bank failures en masse, the government guaranteed them which they don’t have the balance sheet to do. Now the banks are full of toxic loans and bonds that they are underwater with. Why did they end up in this situation? Well, a lot of the blame must come from the Federal Reserve who kept rates low and money supply growing since the great financial crisis. If we look at the numbers from the St. Louis Fed, the M2 money supply increased from $8T to $16T before covid. It then leapt to almost $22t in less than two years. Residential real estate prices are up over 60% since then as well. This should not come as a surprise. It was done almost 100 years ago.
Now we have put ourselves in a very similar place to right before the Great Depression. We are in a bubble, but we have tried to cut it off with declining money supply. There are other similarities and next week we will try to figure out which fork or path we will choose to go down. It could be determined by who gets elected in November just as it did in 1932.
Sincerely Yours,
C Thomas Printer
On this date in history… 51 years ago to be exact, General Augusto Pinochet led a coup d’etat, seizing power in Chile.
Also born on this date …. The subject of our Chinatown piece, William Mulholland.
Thank you for listening today and you can find all of our articles and more on our website cthomasprinter.com.