If the government had resorted to the printing press to get all the money spent—then the average man on the street would understand the danger and object. The difficulty is that the money is obtained in a roundabout way which has the same ultimate effect but which the man on the street does not understand. The government has been issuing bonds—these bonds are sold to the banks—the government gets the money from the banks and pays it out for relief, public works, etc. The people who get the money spend it and ultimately it flows back to the bank. This has been continued time after time until the banks are choked with excess reserves amounting to over three billion. If this money is ever withdrawn and put in circulation, we will have inflation—especially if each dollar of bank money produces $10 in credit money. The amount is fabulous and the situation is packed with dynamite which may bring a crash exceeding 1929.
Two things may happen to cause depositors to withdraw this money and spend it:
1. The depositors may lose faith in the credit of the government and withdraw their funds in order to buy real estate.
2. If business improves, business men may borrow the money for business purposes and this again means danger.
6/10/68
This has not yet happened.
7/8/72
Not yet.
The worst feature of it all is that people are no longer worried about government spending. An additional billion or two seems to mean nothing. When Coolidge was President in prosperous times he refused to pay the soldiers’ bonus for fear of inflation and the people agreed with him. Today, in the face of unprecedented deficits, the people see Congress approving the bonus and there is hardly a murmur. The general indifference to increased spending seems to me to be a danger signal.
JANUARY 4, 1936
President Roosevelt delivered his annual message to Congress. He delivered it personally—at 9 P.M.—and over a national hookup. It turned out to be an emotional political plea to the people instead of a message to Congress on the State of the Nation. During the speech he was applauded by the Democrats and booed by the Republicans. It is said to be the first time in history that a President was so treated in Congress. Many people felt the President had opened himself up to such treatment by using Congress as a political hall. The speech contained very little of importance. In his budget message to Congress the next day the President was very vague. He did not know how much would be needed for relief but said there would be no new taxes in 1936.
JANUARY 6, 1936
The Supreme Court of the U.S. invalidates the Agricultural Administration Act (AAA). This is another reverse blow to the administration. Under this act the New Deal sought to raise agricultural prices by limiting and controlling production. The farmer was paid by the government for
not
raising pigs, cotton, wheat, etc. above a certain quota. A processing tax was placed on the balance which the consumer had to pay and this tax was paid to the farmer. It succeeded in raising prices of pork to 40¢ a pound (from 20) and the farmer got his money at the expense of the city worker. It also forced into bankruptcy many meat packers, cotton mills, etc. It started boycotts by housewives who refused to buy meat, etc. at such exorbitant prices. At a time when millions were starving the AAA cut down the production of wheat, hogs, etc.
By a 6 to 3 decision the Supreme Court said the AAA was unconstitutional and the government had no way to indirectly use its taxing power in order to control agriculture.
The next question is whether the government will have to pay back to the packers and producers the processing taxes which they paid under protest. Much of these taxes were impounded in the courts pending a final decision.
JANUARY 14, 1936
The U.S. Supreme Court again decides against the New Deal in the Rice Mills Case. It is held that the government must pay back the processing taxes which were illegally collected under protest. Many millions are involved. It will prevent the gov’t from collecting these taxes and force the repayment of huge sums. The Steiner Provision Co. of Youngstown will get $90,000 back this way. The Standard Textile Co. has almost a million at stake. This all goes to further unbalance the budget and makes more imminent the danger of inflation.
JANUARY 21, 1936
The U.S. Senate approves the payment of the soldiers’ bonus by a vote of 76 to 14. The vote is large enough to over-ride the expected presidential veto. This will add a burden of over two billion to the budget. Nobody seems to get excited over it and the general feeling is that while so much money is being spent the soldiers may as well get theirs. It is a dangerous doctrine.
JANUARY 23, 1936
I read a very able review of the entire financial situation in the annual review number of the
New York Analyst.
The writer came to the following conclusions:
1. The recovery that started last March is bona fide and will carry thru, with minor interruptions to final recovery.
2. Even tho the recovery so far and the stock market advance have been spectacular—we are still at a point in industrial production which is as low as the low points in almost all other depressions (about 12% below normal).
3. In other depressions the final recovery was spectacular and continued not only from the depth to normal but continued on far above normal. In all past depressions this spectacular recovery above normal was compressed within a space of 12 or 18 months. If this depression runs true to form—then the next year may see a continuation of spectacular recovery in a straight line upward until we are far above normal.
4. On this basis the market recovery since March is justified and stock prices are not too high. On this basis also the next two or three years offer very fine prospects for great enhancement of common stocks.
5. The near-term prospect in stocks is clouded by political uncertainty both here and abroad.
6. The writer says little about inflation. However if a general European war or other great catastrophe happened it would go hard with this country because of our precarious financial situation. Government bonds would depreciate because of higher interest rates and many banks might close because of over heavy subscription to government bonds.
12/21/37
This prediction was wrong. Stocks continued up until September 1937 and then came a worse severe era which is not yet ended. Stocks lost more than 50% and are now below 1935 prices. The 1936 boom was an inflation boom following bonus payments and was not the final recovery. Business is now 20% below normal and never exceeded normal. Steel mills now operating 30%. Much suffering.
10/15/45
Time out for WWII. The stock market takes off where it left off in 1937 and talk of inflation is heard again with renewed vigor.
10/15/45
We had a war and gov’t bonds did not depreciate because interest rates were kept low.
It is curious to see how everybody is dabbling in the stock market again. The fact that they were cleaned out in 1929 seems to make them determined to make up their losses.
One client tells me how he and his brother last summer each bought 1000 shares of Warner Bros. at 3 1/2. One brother still holds his stock and the price is now 11 1/2. The other sold 500 shares for $5500 and set aside the money for his son’s education. The balance of the stock he still holds.
12/21/37
Sequel. The Warner stock went up to 18 and then crashed to 7. Client held on and when stock reached 18 he started to buy on margin thinking it would go to 1929 prices. Was almost wiped out. Moral: Don’t be a hog.
Dr. K. tells me that he has already made up his 1929 losses and is putting every cent he can lay aside in common stocks on the theory there will be a considerable profit over the next two or three years. None of these people seem to know the first principles of investment—how to gauge the value of a stock or how to look for accurate information. They buy and sell on tips and since the market has been rising since 1932 they are coming out ahead. They lay nothing aside in bonds. I wonder how many of them will be able to get out at the right time.
The French cabinet falls yesterday—a radical cabinet steps in and devaluation of the franc is expected soon. France has experienced severe depression in the past two years and much of her gold has been sent to America in anticipation of devaluation.
JANUARY 25, 1936
The President vetoes the soldier bonus and his veto is promptly over-ridden by an overwhelming vote of the House. The bill goes to the Senate Monday with prospects that it will be passed over the President’s veto. It calls for payment to the soldiers of over $2 billion in gov’t baby bonds bearing 3% and convertible into cash beginning next June 15th.
The following developments have again aroused a flock of inflation rumors.
1. Passage of bonus bill and publication of bad condition of gov’t budget.
2. Rumors that dollar will be further devalued.
3. Rumors that silver price will be raised to par with gold.
4. Dollar breaks sharply in foreign exchange caused by European selling of dollars.
Stock market is restless and uncertain. Federal Reserve Board lays down a rule that stocks cannot be bought on a margin of less than 55%. Looks as if they are afraid of a runaway market.
JANUARY 30, 1936
It is interesting to note that United States Steel Corporation is the last to recover from the depression. This is because of its huge size and because it made mostly heavy steels. Independent companies making lighter steels did not fare so badly. In 1934 U.S. Steel lost 21 million and in 1935 it made a profit of a million—the first since 1929. On the other hand, motor companies recovered two years ago. In 1935 General Motors showed a profit of $129,000,000—the highest since 1929.
FEBRUARY 4, 1936
I made out my application yesterday for my soldiers’ bonus which is payable in U.S. Bonds that can be cashed after June 15, 1936. I expect to hold the bonds as they carry 3% interest. The payment of the bonus was rejected by the President but he was easily over-ridden in both houses of Congress.
Inflation discussion rages in Congress. Europe thinks we are going to have inflation and the dollar has weakened on the foreign exchange market. As a result gold shipments are starting back to Europe. A shipment of $15 million yesterday marked the first turn in the gold tide which has been flowing toward the U.S. for more than 18 months. The loss of 15 million gold out of a gold stock of $10 billion is insignificant—but the reason for the shipment is Europe’s loss of faith in U.S. currency and that may bear further fruit.
Inflation talk has been created by the need to raise cash for the bonus and other expenditures. Because this is a presidential election year both Roosevelt and the Congress are reluctant to levy new taxes which is the proper thing to do. They are considering two other methods—issue and sale of more government bonds—or printing press money. Either method is bad but the inflation group is urging the printing press. I wonder how much longer the government spends money without the levy of new taxes. Deficits have been accumulating for seven years and that of this year will make a record—over five billion deficit for this year alone. The willingness of politicians to hand out bonuses and other gratuities—and their unwillingness to levy taxes—seems to be the answer. The printing press seems to them an ideal way to spend money without taxation. On the surface the inflationist argument appears to be convincing but they do not seem to realize that printing press money lays the most vicious tax of all.
The stock market continues up but slowly. There has not been a bad break for almost 10 months.
FEBRUARY 11, 1936
Inflation talk continues to dominate the scene. A typical example of what is going on is the court action by trustees of Leland Stanford University asking permission to convert part of their bonds into common stock. One of the witnesses called was ex-President Hoover who testified that in his opinion there were grave prospects of inflation and that in order to preserve its assets the university should convert part of its bonds into common stocks. Institutions all over the country are doing the same thing. Some investment organizations have been liquidated and money returned to investors so they could do their own speculating. It is this persistent conversion of bond money into stocks which has sustained the long up-swing in the market. Yesterday the market advanced again and some of the steel stocks were spectacular. Sheet & Tube sold over 50—and last March was at 12.