by Bruce Cherney
According to many financial market commentators, the worst of the recession is now over in Canada, and the economy is now poised for recovery. Even in the United States, the heartland of the recession, the news appears to be more optimistic than has been the case recently.
“Recent indicators suggest the severe recession gripping the U.S. economy since late 2007 is slowly winding down,” said Kip Beckman, the principal research associate of the Conference Board of Canada.
“Canada was in a better position going into the recession and will post a comparatively stronger rebound in 2010,” he added. “But the deep hole that the U.S. economy dug itself means that the full recovery from the current recession will take several years.”
While there is evidence of a recovery, many are still wondering why so few economists were able to foresee the likelihood of a recession arising in the first place and why their warnings were off-handedly dismissed. The lack of warning was made clear recently when Britain’s top financial experts felt they owed the Queen a written apology for not recognizing that a economic crisis was inevitable.
The lesson from history is that while the good times roll along, few so-called experts have been attuned to the vagaries of the marketplace, which has stupendously crashed with great frequency.
In 1929, some people were warning that the stock market was perilously poised to make a dramatic correction, but most were simply too wrapped up in the euphoria of making a quick buck to take notice of the predictions of an impending doomsday.
There were signs not all was well on Wall Street, but downturns were quickly followed by rallies, which led many to believe the good times could only be briefly interrupted.
The column Trader’s Viewpoint in the Manitoba Free Press on Monday, August 5, 1929, claimed the stock market was performing “extremely well in the face of decidedly unfavorable money factor. The continuous strength of call money fluctuating at highest price of the month should have had as a rule, a far more depressing effect on the market, but apparently the latter appears to be in very strong hands ... The early part of the week saw the market sink below the congestion of the previous two weeks, bringing the reaction to about ten points from its extreme high.”
The commentary said the market had recovered all its decline and “scored a new high,” indicating a “very strong market.”
Yet, the Trader's Viewpoint, written by Clark, Martin & Co., urged caution due to danger signals being in abundance which could not be ignored.
In latter weeks, the stock market posted rallies close to the market high recorded on May 4, prompting a new wave of optimism.
“By the summer of 1929,” wrote John Kenneth Galbraith in his book on the crash, “the market not only dominated the news, it also dominated the culture.
“Speculation on a large scale requires a passive sense of confidence and optimism and conviction that ordinary people were meant to be rich ... An immediate desire to get rich quickly with a minimum of physical effort.”
And there were plenty of people willing to speculate in the stock market. While the market was dominated by large pools of wealthy investors, teachers, clerks and others were willing to invest their meager life savings in the market in the hopes of making a quick return. Financial pages in newspapers reported Radio Corporation of America (RCA) stock had jumped from $10 a share to $573.
To keep the good news on the front page of newspapers, wealthy pools of investors bribed reporters to promote certain stocks to drive up share purchases by the gullible. When the stock exploded in value, the investors cashed in and made a hefty profit.
Radio stocks — the dot-com of the Roarin’ Twenties — were based on false hope. RCA never paid a dividend throughout its growth years in the ’20s, when it was believed as in the popular song of the day that “anything goes.” Radio stock lacked real value and only benefitted from the greed of the many to sustain its upward climb.
All segments of society were taking on tremendous debt, which was used to fuel the stock market — eerily similar to the mortgage debt that led to the 2007 meltdown in the U.S. that subsequently spread across the globe. The massive debt accumulation was not without consequences. Prior to October 29, 1919, small banks in the U.S. were falling at the rate of two a day due to the weakness in banking regulations, which again sounds eerily familiar, although it was not small banks, but large financial institutions bearing the brunt of the recent recession.
Some investors did become cautious, but such tentativeness went by the wayside when Charles Mitchell of National City Bank in March 1929 made $25 million in loans available to money markets.
Thomas Lamont, a partner with American millionaire banker J.P. Morgan, said “the future appears brilliantly,” as stock prices soared upward to new dizzying heights.
Stock was bought on margins; that is, an investor could purchase a stock by merely putting down a certain percentage of its market value and then guaranteeing the seller that the full amount would eventually be paid. This type of purchasing required that the stock continually rise in value so that when the margin was called, the seller would be satisfied and a profit could also be made by the purchaser.
But stock bought on margin was also being used as collateral to buy other stocks — some stocks were bought for as little on margin as two cents on the dollar — and the seeds of a future calamity were sown.
On October 16, Mitchell declared that “market values have a sound basis in the general prosperity of our country.”
But on the same day, reports in newspapers talked of a “nervous price tendency” in the New York stock market. There was talk of “omens” of another reaction to trading that would contribute to a “burn away” in billions more dollars of paper profits.
On Thursday, October 24, Winston Churchill, the future wartime British prime minister, was sitting in the balcony of the New York Stock Exchange when the market began to lose momentum. The frenzied trading resulted in the ticker tape being a half day behind in transactions. Hours after the market closed, it was announced over 12-million shares had been traded. Churchill called the activity he witnessed as taking place in an atmosphere of “calm and orderliness”
In the midst of the crisis, New York-based bankers met at Morgan’s headquarters and came up with a scheme to inject $130-million to revitalize the market. With the blessing of the backers, Richard Witney, president of the NYSE, put in the first buy order, purchasing US Steel stock at several points above its market price of $200 a share.
The 1929 bail-out by the bankers reflected a similar manoeuvre by Morgan during the stock market crisis of 1907.
“For the past 24 hours the White House and the Treasury Department have been bombarded by frantic ... appeals from the government to do something to check the tumbling of stocks in Wall Street and avert a threatening panic,” reported the New York Times following the March 13, 1907, crash.
But it was Morgan, rather than the White House who came to the rescue. He locked up a group of New York trust company executives in his East 36th home until they supported his plan to promise $25 million to bail-out the nation’s banks. For eight weeks in the fall of 1907, Morgan tried to put out the financial fires as they appeared, moving cash to where it was needed, acting as the nation’s central banker at a time when the U.S. Federal Reserve didn’t exist.
The powerful Morgan, who held sway over other bankers and could intimidate them to bow to his will, told the bankers at a time when “important reforms in ... (the) ... banking systems” were needed to prevent a recurrence of the 1907 crisis, that he would be closely watching the short-sellers, vowing to “properly attend” to them in the future.
Despite Morgan’s vow, any lessons learned from 1907 were forgotten, and people believed the market would continue to reap profits for investors.
Morgan’s action in 1929 and the market’s apparent recovery prompted American President Herbert Hoover to announce the business of the nation was on a sound footing.
But on Monday, October 28, the market returned to its slide with over nine-million shares traded. So-called Blue Chip stocks such as US Steel and RCA were the most actively traded. By the end of the day, RCA had lost a third of its value. The New York Times estimated nearly $14 billion had been wiped out in the market’s value.
Some did benefit, such as Albert Wiggin of the Chase Bank, who sold short and realized a $4 million profit. He used his Canadian shell companies to hide his profit and thus avoided paying capital gains tax to the U.S. Treasury.
Wall Street Lays an Egg was the headline in Variety when the market crashed on “Black Tuesday,” October 29.
The real tragedy was that margins were being called as the price of stock dropped precipitously. Thousands soon discovered they couldn’t find enough cash to pay their margins so their assets were liquidated by their creditors and they were wiped out financially.
William Durant, the founder of General Motors, was said to have accumulated a fortune pegged at $100 million by manipulating stocks, but the crash left him penniless. He was reduced to gaining a living by washing dishes in a restaurant.
In Toronto and Montreal, 525,000 shares were liquidated. Margin traders joined their New York counterparts in suffering the effects of the crash.
In Winnipeg, news of the panic selling was printed on newspaper front pages. The Free Press said it was the worst slump experienced on Wall Street in financial history. On October 29, the newspaper carried an Associated Press dispatch by Claude A. Jagger, who wrote: “Powerful financial interests stepped aside today and let the stock market drop like a plummet as a huge mass of wreckage from last week’s crash was dumped overboard, drawing after it much panicky (sic) selling and instigating another ‘bear’ rampage.”
A day later, the Fress Press, using another AP dispatch, this time by Stanley W. Prenosh, reported on the trading “stampede” on Wall Street resulting from more selling. By October 30, well over 16-million shares had been traded over the course of two days.
While the bankers sat on the sidelines on “Black Tuesday,” they weren’t prepared for the massive collapse that day and hurriedly met in conference that night and at noon on October 30, buying up blocks of shares to prevent a complete debacle. The bankers also eased credit conditions for stock bought on margin from as high as 40 per cent to six per cent and then five per cent.
U.S. insurance executives also attempted to stem the tide by purchasing leading common stock in view of the “drastic readjustment of prices.”
Executives of US Steel tried to restore confidence in their stock by offering a dividend of $1 on each common stock
Canadian banks assured investors that economic conditions were strong in the nation, but the Toronto and Montreal stock markets still collapsed.
“The market (in Toronto) opened (on October 29) with a roar of selling and finished with a cheer of relief from madly worked brokers. Spectators in the galleries, many of them who had seen the better portion of their life savings carried away by the smash, also displayed their joy when the market closed ... In between the opening and closing gong, prices moved in a decidedly erratic fashion as selling became more and more panicky ... While today’s reaction proved disastrous for a great many of the small investors, local brokers did not suffer any difficulty in meeting their commitments, according to A.E. Wark, secretary of the Toronto Stock Exchange.”
“Excited crowds jammed Winnipeg stock brokers’ offices Tuesday when the news went out that the New York break was widening,” reported the Free Press. “Stock traders who had been able to hold on jostled the little man who had been wiped out in an effort to get near the board to watch the New York rout. The stock ticker, stopping and sputtering, hours behind the market, was registering the huge selling waves ... As this or that stock would toboggan to new low levels a selling order would be handed in.”
Hours after the market closed, many still believed the market would readjust “to proper levels.”
One Winnipeg banker said the “diffusion in stocks was expected, and that it would probably do more good than harm. The same banker interjected that it was too bad that the correction had gone to such an extreme.
Even when the crash struck the NYSE on October 29 and then the Montreal and Toronto stock exchanges, many still believed that it was a temporary setback and happy days were just around the corner.
Canadian bankers came up with a plan to help the nation’s stricken stock markets, reducing their call rates to brokers to 15 per cent in stocks selling at about $30 and to 10 per cent a share on stocks under $30.
“It means the banks are satisfied the country’s prospects are sound,” said Norman Urquahart, the head of the Standard Stock and Mining Exchange.”
As the market plunged that day, Canadian Prime Minister Mackenzie King said: “While a number of people have suffered to the sharp decline (in stock prices), the soundness of Canadian securities is not affected. Business was never better.”
The prime minister said in a brief statement on October 29 that Canada’s economy had never been sounder, and his faith in the development of the nation never greater.
“It was at times like these, said Mr. Mackenzie, “that one realized the importance of stability in laws and general soundness of business in a country,” according to a Canadian Press report. “Canada’s position was secure, he thought, and he pointed to the growth all along the line of primary and secondary industries in the country.”
This time around, Morgan and the New York bankers weren’t able to prop up the market — they realized it was beyond redemption. The consequence of the stock market collapse was the “Lost Decade” of the Great Depression, which spread outward to envelop the world.
On the Canadian Prairies, the market collapse was compounded by a failure to sell wheat on a glutted world market. Between July 1929 and December 1932, export prices for farm products declined 70 per cent.
“Western agriculture bore the brunt of both fluctuating export income and the rigid costs of the Canadian economy,” said economist A.E. Safarian.
Farmers could get credit during the boom times of the Roarin’ 20s, but when wheat prices fell in 1929, the rule of thumb was foreclosures and evictions when they couldn’t meet their loan and tax obligations.
Manitoba farmers lost up to 50 per cent of the income as the Great Depression rolled along. Wheat prices dropped from a dollar a bushel for No. 1 in 1929 to 34-cents by 1932. If the fall in wheat prices wasn’t enough, the prairies were blanketed by a “dust bowl” after the rains stopped. Choking soil swept across the land, and any crops that could be grown under the trying conditions were quickly devoured by ravenous grasshoppers, whose population explosion was aided by the arid conditions.
As farmers experienced hard times, so did Manitoba municipalities. In Chatfield, the provincial trustee had been accepting tax payments in livestock in lieu of cash, but this practice was discontinued when prices for cows and pigs tumbled downward. Chatfield became a “disorganized” municipality due to its financial woes. In effect, its council was replaced by a trustee appointed by the province to oversee a type of government-sanctioned receivership. It was a fate shared by many Manitoba municipalities.
“The economic support of nearly 40 per cent of Manitoba’s population virtually collapsed” due to the drop in grain prices, according to the Rowell-Sirois Royal Commission on Dominion-Provincial Relations released in 1940. Annual per capita income in the province declined from $466 in 1929 to $240 in 1933, bearing consequences for the province’s cities and towns and their residents.
“It is now forty months since I had the pleasure of a paycheque,” wrote Winnipegger Charles Grierson, an electrician by trade, in a letter to Prime Minister R.B. Bennett in 1933. “My family are all undernourished, ill-clothed and ill-sheltered and in need of medical assistance.
“How long do you think we can continue under these circumstances?
“Possibly you have never felt the pangs of a wolf (Bennett was an extremely wealthy man when he replaced Mackenzie as prime minister). Well, become a father, have children, then have them come asking you for a slice of bread between meals and have to tell them to wait. Wait until five of humanity’s humans sleep all in one room, no larger than nine square feet with a window in it.
“I do not believe I am crazy but am reaching the breaking point.”
The jobless rate reached 25 per cent in Manitoba throughout the 1930s, but relief was hard to obtain — for single adult men it was almost impossible to obtain.
Arthur MacNamara, Manitoba’s deputy minister of public works expressed the philosophy prevalent among many city and provincial politicians, when he said single unemployed men should not be eligible for relief, “because I feel that a man without dependents should be able to take care of himself.”
Manitoba Premier John Bracken also believed in the philosophy of every person paying their own way. When over 350 disgruntled farmers from the Interlake, suffering the dire consequences of the Great Depression, including potential eviction from their land, marched to Winnipeg in 1932, Bracken told them, “You have asked to be given everything and to pay for nothing.”
After a meeting on October 17, 1932, Bracken promised the delegates representing the farmers that law and order would prevail in Manitoba and there would be no “give aways.”
On November 19, 1932, the lack of progress on the farmers’ demands resulted in the “Arborg Tax Revolt” during an auction sale of 165 properties by the RM of Bifrost. The reeve was assaulted and the sale disrupted, but it did go ahead on December 14, when 125 of the properties were sold for tax arrears ranging between $70 and $125.
Married men with families before becoming eligible for relief were told by Winnipeg officials they had to work at the city’s wood yard. But as more and more people joined the ranks of the unemployed, the city was forced to open up work at the wood yard to single men. By the summer of 1930, there were 3,000 single men on relief in Winnipeg. A federal government survey revealed that over 7,000 single men were unemployed in Manitoba.
To address the problem, the city created the Grassmere drainage project, entailing the construction of a massive flood protection ditch running from the Red River to Brooklands. The men were given shovels and picks and told to excavate the three-metre-deep ditch with their only payment being food and lodging. The Free Press thought this was marvelous, as the project required a minimum expenditure on material and equipment. Two thousand men laboured on the project, although they eventually rebelled against the poor conditions at the camp and the lack of pay.
The city set up soup kitchens, where the fare was described by one man as “awful ... a tin bowl containing a green fluid sometimes called soup, a tin plate in which had been dumped potatoes, two large banks of fat, some carrots and thick gravy.” The cost to the city was a mere 10-cents a meal.
Families on relief were subject to surprise visits by officials to ensure they obeyed the regulations which stipulated a family could not own a car, a telephone or keep liquor in the home. Any money made, even that made by a child, had to be reported to the city. To ensure this regulation was followed, the city reserved the right to check the bank account of any person on relief.
Immigrants were even worse off since federal law said anyone not a Canadian could be deported for various political beliefs that allegedly threatened the nation — being a Communist involved in the “Red Menace” topped the list.
In the North End, where immigrants had settled en masse, anger over their treatment resulted in 1,000 marching on the Winnipeg immigration office. It is estimated that between 1925 and 1935, Canada deported 28,000 men and women for their radical ideas or for simply seeking relief. In many cases, “foreigners” were made the scapegoats for the Great Depression, since they “took jobs” away from good Canadians — it was forgotten that they only applied for relief because, similar to “Canadians,” they were jobless.
One Manitoba politician said “in our town (Winnipeg), when those foreigners from across the tracks (in the North End) apply for relief we just show them a blank application for voluntary deportation. Believe me, they don’t come back. It’s simple but it has saved the city a lot of money.”
The province paid 10-cents a day to each unemployed man to clear bush and build roads and facilities in the Whiteshell Forest Reserve in order to create a cottage area for Manitobans.
A similar work camp was established at Riding Mountain National Park by the federal government where men earned 20-cents a day in exchange for the right to work under primitive conditions.
“Picture yourself a tarpaper shack 79 feet by 24 feet with no windows, along each side a row of double-deck bunks, these were spaced off with 8 by 1 board so there is room for two men in each bunk,” wrote one of the camp’s residents in a letter to Winnipeg MP and Co-operative Commonwealth Federation (CCF, the forerunner of the NDP) Leader James S. Woodsworth. “The bunks are filled with straw and you crawl into them from the front end. Along the lower bunk a narrow board is in place upon which you could sit ... So narrow is the passage between the bunks that when the men are sitting on the bench there is scarcely room to pass between them.”
The same man said the shack housed 88 men and resembled “a hog pen or a dog pound.”
Men began to refer to the facilities fostered by the federal government as “slave camps.”
Bennett proclaimed the camps necessary, as, “This government will not put a premium on idleness, and will not put Canadians on the dole.”
Another scheme the Bracken government supported was a back-to-the-land movement — families in relief would be moved to new farms in rural Manitoba. It was a scheme supported by the Winnipeg Chamber of Commerce, but it didn’t go over well in rural areas.
“Sending hosts of people into remote farming districts evokes the risk of creating great rural slums,” the government was warned.
Confronted by the conditions imposed by the Great Depression, governments and citizens were invariably asked to cope with little resources, which created tension and a feeling of hopelessness. It wasn’t until the outbreak of the Second World War and the advent of large numbers of jobs to supply the war machine that the depression was finally broken.