(continued with the book above)
1, Great Depression and Great Change
In the fall of 1929, in order to control the increasingly fierce stock market bubble at that time, the Federal Reserve raised the discount interest rate. The cost of commercial banks to obtain funds has increased, so they have to recover funds previously loaned to stock brokers. Companies have also begun to turn to purchasing other high-yield securities and stop lending to brokers. The stock market funds began to flow out, and the pressure on stock price appeared.
On October 24, the stock market experienced a panic selling, on the verge of collapse, with the number of stock trading reaching 12.9 million shares that day. It was only because of the " rescue " that New York financial institutions are making great efforts to prevent the panic atmosphere.
On October 29, 1929, the "doomsday" of the stock market came. On that day, the stock market fell from a cliff on the verge of collapse into the abyss - 16 million stocks were sold in one day, while Dow Jones Index fell 43 points (about 12%). For investment institutions with relatively high leverage of , hiring the stock market has such a large decline, it is simply a catastrophe. Even well-known investment institutions like Goldman Sachs Trading Corporation cannot prevent their stock price from falling 42% in one day. Tens of thousands of stock accounts invested by leverage were forced to close because they could not add to , and brokers' external loans also stopped, triggering a series of financial "earthquakes" in the following weeks.
Therefore, later generations remembered October 29 as the beginning of the Great Depression. In the history of American financial affairs, this day can even be compared with December 7, 1941 (the day when Japan attacked Pearl Harbor).
The rapid decline in stock prices has left speculators with leverage bankrupt and unable to repay their debts. Stock brokers, as lenders, were unable to recover their loans, and they were unable to maintain their operations, and went bankrupt one after another.
Through stock economists, the risk of stock market decline was eventually transmitted to the commercial banking system. In 1930, the first wave of banking in the US broke out, and 1,350 banks closed that year. The destructiveness of the bankruptcy of commercial banks is huge, with entrepreneurs having nowhere to borrow to maintain their operations, and depositors' deposits are gone due to bank bankruptcy. The banks that were still operating were also in panic and demanded to recover their loans in advance. Many people's housing and cars were taken away as a result. The normal business order was completely disrupted, and the Great Depression broke out in full swing.
The Great Depression has had a huge impact on US economy and society. From the figures, from 1930 to 1932, the United States GDP shrank by 8.5%, 6.4% and 12.9% for three consecutive years, and the unemployment rate soared to more than 20%. Ordinary people are unable to make a living because they lose their jobs, so naturally they can't afford to raise their children. During the Great Depression, the fertility rate of in the United States was greatly reduced.
has no consumer support, and the profits of listed companies have declined seriously. The losses of blockbusters have begun to appear in the financial reports of listed companies, further causing a decline in stock prices. By the lowest point in the stock market in 1932, the stock index had fallen 85% from its 1929 high.
The simple number is actually not enough to reflect the bad situation of the American people. In the depression, even middle-class families who used to have houses and cars could not afford food, mostly transformed their gardens into vegetable fields to be self-sufficient, while poorer urban residents could only be displaced and rely on government relief to make a living every day. The sheds they built were satirically called "Hoover House".
In the countryside, because agricultural products cannot be sold at all, farmers can only burn the grains and pour out the milk. Mississippi River once became a silver river. Soon these farmers also went bankrupt because they could not repay their farm loans and flocked to the city to become homeless people.
Objectively speaking, the Great Depression is an inevitable recession caused by the business cycle and the debt cycle. However, this recession is rare in terms of the extent of the recession and the damage to the economy, reflecting the inevitable "artificial" factors that promote recession. Among them, the US federal government and the Federal Reserve's ineffective rescue of the market is an important reason for the deepening of the Great Depression and the stock market plummeted.
In the early days of the Great Depression, the United States was ruled by President Herbert Hoover, and he adopted a laissez-faire attitude towards the depression that had first appeared.Representing the interests of the big bourgeoisie, he believed that economic affairs should be completely left to the market and that the government should reduce intervention. In addition, he arranged for Congress to pass the Smoot-Hawley Tariff Act in 1930, raising tariffs on more than 20,000 American goods to an all-time high.
Hoover's behavior of raising taxes on imported goods has caused counter-attacks from many countries. Countries have imposed retaliatory tariffs on American goods, and the international trade war has begun. Trade war damages US exports seriously. The second year, the US import and export volume fell by more than 50%, further deepening the depression.
For the Fed, due to restrictions on gold standard and gold reserve , the Fed provided limited funds to the US banking industry, which failed to avoid the banking wave. Before 1933, the United States had adhered to the gold standard system. Under such a system, how much cash the Federal Reserve could put into the banking system depends on the Federal Reserve's own gold reserves. However, the crisis in the US banking industry during the Great Depression was so deep and the funding gap was so large that the Fed's funds based on reserves seemed pale and powerless.
By the time of the worst economic crisis in 1932, the Federal Reserve's gold reserves had bottomed out and had to increase the discount rate to slow down the rate of gold outflow. The Fed's increase in discount rates has triggered another wave of bank bankruptcy, with nearly 4,000 banks going bankrupt the following year, making it the year with the largest number of bank bankruptcies in the Great Depression.
The government's inaction in the economic crisis triggered a strong rebound in American public opinion. Under the call of the people, Franklin Roosevelt, who emphasized the function of a "big government", came to power. In order to save the US economy from the fire, President Roosevelt has made drastic reforms to the US fiscal policy, monetary policy and financial regulatory policies, and laid the foundation for the ruling ideas of the federal government for the next half century.
The Roosevelt government first attaches importance to the importance of government spending in supporting the economy and supporting the market. After he came to power, the federal government successively established employment agencies such as the Federal Emergency Rescue Agency, the Engineering Progress Management Agency, and the Civil Resources Protection Team to hire unemployed people to participate in infrastructure construction. At its peak, the number of federal government employees accounted for 10% of the U.S. labor force. Most of the wages and project funds of these employees come from the expansion of government debt.
In response to the constraints of the gold standard on monetary policy, the Roosevelt administration announced the decoupling of the US dollar from gold, while strengthening the independence and functionality of the Federal Reserve, giving it a stronger ability to implement monetary policy, so in theory, the Federal Reserve has the ability to inject unlimited currencies. In addition, the Federal Reserve has also established a new Federal Open Market Committee to incorporate open market business into the Federal Reserve's monetary policy basket. Committee members are jointly served by board members and local Fed banks, strengthening the independence of the Federal Reserve. The reorganized Federal Reserve began to release money on a large scale into the financial market, and commercial banks received a steady supply of funds, thus stabilizing the entire financial system.
In terms of financial regulatory policies, the Roosevelt administration learned from the lessons of the economic crisis caused by the bursting of the stock market bubble in 1929. In 1933, it passed the Glass-Steagall Act, which stipulates that investment banking and commercial banking business are strictly divided to ensure that commercial banks avoid being transmitted from the risks of securities industry.
This bill prohibits banks from underwriting and operating corporate securities, and can only purchase bonds approved by the Federal Reserve . Regarding the stock market, Roosevelt promulgated the Securities Act of 1933 and the Securities Exchange Act of 1934 in the new policy to crack down on speculative trading in the primary and secondary stock markets and improve information transparency. It also established the U.S. Securities and Exchange Commission (United States Securities and Exchange Commission) to regulate the stock market. These stock market regulatory policies are conducive to attracting long-term investors in the long run, improving the stability of the US stock market and reducing its risk.
Under the leadership of Roosevelt's New Deal , the US stock market and the US economy improved significantly in 1935. However, this recovery is not stable, and US stocks will usher in a major shock in the future.
4. The new policy with uncertainty
In Roosevelt's new policy, the role of increasing government spending in promoting the economy is obvious. From 1934 to 1936, the actual GDP growth rate of the United States reached 10%, 8% and 12% respectively. Supported by government demand, corporate profits have also improved significantly, with the U.S. stock index rebounding from its lows in the Great Depression, nearly doubling. However, in the summer of 1937, the US stock market experienced another serious stock market crash. In just half a year, the stock market fell by about 40%. So why did this stock market crash cause?
Simply put, the Roosevelt administration's judgment on the economy and its governance mistakes are inseparable from this stock market crash. In the new policy, the US's apparent total output growth rate is good, driven by government demand. However, as the foundation of the economy, the confidence of the entire private sector is weak. The US economy is like a tower built on sand and stone, and there is a risk of collapse if there is a slight turbulence.
The private sector is weak in confidence. On the one hand, it is indeed because of the destructive power of the Great Depression that entrepreneurs are still scared and dare not rashly expand investment and production and operation. But more importantly, the Roosevelt administration is not friendly to entrepreneurs, and the layers of regulation imposed weakened the operational motivation of the private sector.
For example, the Roosevelt government sets a national minimum wage and raises this standard every year. Although this is a good thing for the working class, raising the minimum wage in the event of a bad economy obviously increases the operating costs of private enterprise . Without profit, business owners lack the motivation to expand their operations. Even in 1936, the economy was the best, the U.S. unemployment rate still reached 10%, reflecting a weak private sector employment demand.
In such a context where the economic foundation has not yet been solid, the Roosevelt administration rashly interrupted the deficit economy and tightened its fiscal policy in 1937, which would inevitably cause an economic downturn. In 1937, the United States ushered in a new round of presidential elections, and many lawmakers and voters expressed dissatisfaction with the federal government's years of expansion of deficits and worsening fiscal issues. In response to these people's demands, the Roosevelt administration raised corporate tax rates and compressed government spending to balance the fiscal deficit. At the same time, the Federal Reserve has significantly increased the deposit reserve ratio of , tightened monetary policy , and the credit supply of commercial banks has become weaker.
In this way, the economic recovery of driven by the government also came to an abrupt end due to government behavior. As the saying goes, "Success is due to Xiao He and failure is due to Xiao He". The US economy fell into recession again in 1938, and the unemployment rate rose again.
Left picture: 1930-1940 US unemployment rate Right picture; 1929-1940 Federal government fiscal surplus (deficit)
Lucky, President Roosevelt did not lose the election because of others' criticism on fiscal issues. Re-elected, he faced the recession and regained the weapon of the new policy - the deficit economy, and the federal government's fiscal deficit returned to growth. It seems like everything is back to what it was a few years ago: driven by government spending, the total output has grown well, but the private sector is still weak and the economic foundation is not stable. The hero who really led the United States out of the economic dilemma a few years later was another world war.
5, the dawn of victory
On September 1, 1939, Germany launched the blitzkrieg surprise attack Poland , and World War II broke out. For the United States, as well as " World War ", World War II has many similarities with World War . For example, the United States acted as a neutral arms dealer for a period of time in the early stages of the war and did not participate in the war until the middle and late stages of the war; the war in the two world wars did not burn to the United States, the United States' industrial foundation was well preserved, and the stimulation of war production, the production capacity was greatly expanded; the United States' military expenditure increased significantly during the war, and the government's leverage ratio increased significantly; the federal government implemented a planned economy to a certain extent in both wars.
Similarly, the stock market performance in the two wars also has similarities.In the early stages of the war, U.S. stocks experienced a period of decline. On the eve of the United States' entry into the war from 1938 to 1940, Roosevelt's new policy was re-emerged, leading the US economy back to growth.
However, the stock market at this time did not move forward as high as it did when the economic recovery in 1935-36. The root cause is very similar to the eve of World War I - the world's peace situation was challenged by the fascist Axis powers, and business and investment confidence were seriously disturbed under the war suspicion. Especially after the outbreak of the Pearl Harbor incident in December 1941, the United States declared war on the Axis powers. Worries about the war and fears that the Japanese fleet might attack the U.S. mainland further led to a decline in U.S. stock markets, and six months later, the stock index reached its lowest point in World War II.
However, among many similarities, the trends of US stocks in the middle and late stages of World War I and II were very different, which means that the internal logic driving the stock market has changed. After the United States participated in World War I, the U.S. stock index fell one after another, but the U.S. stock index continued to rise in the middle and late stages of World War II. Until the end of World War II, the U.S. stock index had risen by nearly 90%. What factors drive the stock market to rise? Is the profits of listed companies improving? Actually, it is not the case. After the United States joined World War II in 1941, the federal government implemented a more comprehensive planned economy than World War I. At that time, the government stipulated that the profits of all enterprises should not exceed the level in 1940, and the parts that exceeded the upper limit must be remitted to be filled in the treasury. Therefore, even though the United States' GDP grew by 75% during World War II and corporate output increased significantly, the company's profits did not change at all, and shareholders of listed companies did not enjoy the more benefits brought by war production. After
ruled out the possibility of profit growth, the answer to the bullish stock market is obvious, that is, the expected improvement. In the Midway Battle in June 1942, the US fleet sank four main force aircraft carrier at the cost of losing one aircraft carrier . The strength of the Japanese Navy was greatly hit and was unable to attack the US mainland again. The news of the victory of the Midway Navy Battle broke the myth of the invincible Japanese army in the Asia-Pacific region and eliminated the pressure of the United States to defend the country. The US stock market began to rebound at this moment.
As the war continues, the United States' advantages in Pacific battlefield and European battlefields become increasingly obvious. It is a matter of time before the victory of anti-fascist countries is successful. Unlike World War I, this time the United States completely became the protagonist of the war. Investors in the stock market have realized that the order of the post-war world will be dominated by the United States.
In this case, the growth of US corporate profits is a foregone conclusion, and it is likely to usher in a bull market like the 1920s. Therefore, although the government's regulatory economy has not been cancelled at the end of the war and corporate profits have not resumed growth, investors in the stock market are already scrambling to buy stocks. After all, for them, buying stocks is buying the bright future of the United States.
When we look back at the US stock market during the entire World War I and II, we can find that although the index had peaks (the bubble of 1929) and troughs (the Great Depression), the US stock market was still on an upward trend, which was in sharp contrast to the British stock market during the same period. In the long run, the rise and fall of the stock market will inevitably reflect the fate of the country. Through the two world wars, the United States completed its transformation from a second-rate country to a superpower with economic hegemony and military hegemony. Although dark clouds were blocked during
, nothing could stop the United States from rising like a rising sun. The rising stock market has become the first ray of hot light emitted by this rising sun. When the bell of the end of World War II rings, the American century is truly coming, and US stocks will also usher in another legend along with this economy .
~The full text is over~
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