But an analysis of that economic crisis does show a silver lining on this side of the Atlantic. And thanks to Dr Bernanke's lengthy study of the subject, the Fed may have learnt the lessons to avoid a replay.
1929 wasn't the worst
For a start, we can separate the myths from the facts. The 29 October 1929 was not the greatest one-day fall on Wall Street – the 12 per cent fall then compared with 24 per cent in 1914 and 22 per cent in 1987 – and the market ended the year higher anyway. The real disaster was that, having risen fourfold between 1924 and 1929, the Dow Jones Industrial Average continued to fall until 1933, shedding 89 per cent in total - and it took almost twenty years to recover that ground.
The London market fell only half as much and there was an early recovery. Nor was the immediate impact of the Wall Street crash on the City as disastrous as might be thought. The selling of shares to repay loans from banks was far less prevalent than in New York, so there was little panic selling, and most prices held firm. What did hit British banks, however, was that short-term loans to stockbrokers became unrecoverable when the collateral was securities based on dwindling assets.
By contrast, the fall on Wall Street stemmed from frenzied borrowing – as much as nine times the value of a stock that was itself geared as high. Instead of causing the economic crisis, it was a symptom of unrealistic expectations from easy money, like the parallel Florida Land Boom that had finally collapsed after a couple of hurricanes.
Beltway bunglers
A slowdown was due, but it became a slump as a result of Washington's belated and misguided reaction, such as making money too dear. In 1930, the Smoot-Hawley Tariff Act provoked competitive protectionism overseas, strangling international trade. The Banking Act of 1934 was too little, too late, so depositors lost $140bn in the decade as 9,000 banks failed while the sound ones restricted credit. The same year, President Roosevelt raised the gold-price from $20.67 to $35 per ounce, causing an outflow from other central banks.
Ever since, folk-memory has been haunted by the images of soup-kitchens, the collapse of welfare and 15m Americans on the dole, but the Depression was not as deep over here. Admittedly, the Prince of Wales warned that "something must be done" after visiting idle miners in the Rhondda, but unemployment actually eased after its peak of 2.5m in 1930.
It was the following year that saw the financial crisis, caused by City banks' borrowing short and lending long to countries that could not repay. Alliance Trust had worthless coupons on 270 of its 1,000 investments in 1934. Another sign of the times was that building societies’ savings rates reached 6 per cent in 1931, staying that way for two more years – a level not seen again until 1957. After a serious run on sterling, with the Bank of England likely to default on its obligations, the ruling Labour party agreed to a national government that immediately increased the standard rate of income tax from 22.5 per cent to 25 per cent and reduced all official salaries. Sterling slumped to about two-thirds of its former level, going from $4.86 to $3.23.
The crisis was mirrored in the monthly average of the FT30 index that celebrated the start of 1930 above 88 only to fall to 72 by the year’s end. By May 1931, it had declined to 57 and, despite summer and autumn rallies, it slumped to 52 in June 1932 ahead of a drop in Bank Rate (its peak was 6 per cent) to 2 per cent and the stupendous rescheduling of 5 per cent War Loan via a 3.5 per cent alternative. The FT30 then rebounded to 61 two months later and then 65 in October 1933, the same level as a year earlier. It continued, with little setbacks, to recover all the lost ground by April 1934, despite the burden of debts and tax.
Some good came out of it
The index reached 100 in mid-1935, boosted by expanding light industries, especially those involving motors, electricity and domestic equipment. For example, the output of vacuum cleaners rose from 37,550 in 1930 to 409,345 four years later. The total of listed firms in manufacturing and distribution more than doubled to 1,700 between 1924 and the late 1930s, a typical entrant being Great Universal Stores.
Throughout the decade insurance companies were becoming important investors although, by 1935, they still had only 54 per cent of their assets in quoted securities, and those were mainly government stocks. Eagle Star was the exception, with 28 per cent of its investments in equities.
Also in 1931, the City gained an even more unlikely bonus from the transatlantic turmoil.
Seeing that American mutual funds had foundered through pyramid borrowing, Municipal & General offered a so-called fixed trust, investing only subscribed funds in 200 of the soundest British companies, such as Boots and Commercial Union. By 1939, there were no less than 98 of what we later become to know as unit trusts.
History may not repeat itself exactly, but at least we have a pattern for any replay. And if the Great Depression produced the Grapes of Wrath and Jarrow March, it also gave us the Empire State Building and M&G.
