Credit Worries - 1936 Revisited

I was recently reading a article about the Chase Bank in a 1936 Fortune magazine. 1936 was in the middle of the Great Depression, and the management of Chase was worried about there being too much credit. If nothing else, the Depression was not caused by a lack of money. Banks like Chase weren't making all that many loans, and they were parking their money in treasury notes paying a fraction of a percent. There was money, but it wasn't moving much.

Their big worry was the $30,000,000,000 in loan making capacity that the various banks had on their books. The entire Roaring Twenties boom had been fueled with reserves of only $14,000,000,000, so having double this amount, just sitting around and looking for bubbles was worrying. Unlike modern bankers, Depression era bankers had had enough bubbles for a lifetime and were hoping for a more stable economy.

So, how much is $30 billion? The GDP in 1935 was about $73 billion, so it was about 40% of the GDP. That's about $5 trillion today, but we have a lot more people in the United States, so we probably have an equivalent number at about $2.5 trillion. That's still a lot of money, but what is striking is the ratio between the two numbers. The ratio is about 80 to 1. A nickel hot dog would run about $4 and a $500 new car would run about $40,000 today. A factory worker making 50 cents an hour would be earning $40 an hour today. You might find yourself paying $4 for a hotdog or $40,000 for a new car, but there aren't a lot of factory jobs, or jobs of any kind, paying $40 an hour these days. Obviously, our economy has restructured a bit.

Of course, there was no big bubble in the 1930s. The economy actually lost ground in 1937. What happened to that $30 billion? It stayed in the banks invested in Treasury notes paying less than 1% per annum. If nothing else, FDR could borrow cheaply. Basically, no one wanted to take a risk and lend money to anyone but the most reliable borrower.

There was investment in the 1930s, but it was fueled by cash flow and, now and then, by the sale of stock. Unlike boom periods, when stock prices are linked to earnings, during the 1930s, stock prices were linked to liquidation value. This made it hard to raise money, but if you bought stock at FDR's inauguration, assuming you had some money to do so, you would have done well.

Are we likely to get into such a situation today? Probably not. In the early 1930s, there was no Federal Reserve to cushion the economic collapse. If the economy took you down, you went down. On the other hand, don't expect high yields on your CDs for a while.