'The Money Panic'-a guide for survival in six parts

Part 5: The panic

Condensed from the book by Martin D. Weiss

The following section, with the exception of certain past statistics, is entirely fictional. It was written during the summer of 1974 from the perspective of a mythical twenty-first-century historian looking back on the hectic days of the mid-1970s. The reader should bear in mind that the names have not been changed, but that any action or statement attributed to them is entirely a product of my own imagination. Some of the events predicted have already occurred. Some may never occur. Many however, could very well be upon us, in one form or another, within the next twelve months.

The ghosts and witches of all past economic collapses converged into one time-space co-ordinate for a reunion with history and posterity. The result was The Great Marley Panic. Like the panics of the 1800s, the Great Mondy Panic included a major bust in land and real estate. Then, thousands of local banks financed the real-estate bubble through the unregulated printing of paper called 'money' or 'dollars'. This time .local banks financed the cal-estate bubble through the unregulated nting-of paper called 'mortgages' and 'home rovement loans.' Like the 1907 panic, the Great Money Panic included a speculative boom in metals and commodities.

Like the 1929 panic, it pulled the rug out from under the speculative pyramids in the banking and brokerage industries. Then the debt pyramid centred primarily in brokerage loans, with some as low as 10 per cent margin on stocks. This time the debt pyramid had spread into every sector of the economy, leaving the entire nation, including the stock market and other commitments, on average margins of sometimes less than a net of 10 per cent.

But the Great Money Panic was all of these wrapped up in one, and that's where all the similarities ended. Previous panics had been relatively isolated, limited to one geographic area, to one privileged socio-economic class, to a few powerful cliques, to the weakest sectors of the economy. Moreover, they were always cushioned by relatively liquid or flexible groups which reduced the steepness, the speed or the depth of the declines: the powerful Morgan group that helped limit the 1907 panic largely to New York City: the duPonts and powerful banking houses which provided the support for General Motors, Goodyear and others during the 1920-21 crash; and most important the giant manufacturers and the Federal Government which used the hoards of cash and gold reserves, accumulated during the roaring 'twenties, to pull the United States out of the Great Depression. But, during the Great Money Panic, except for one or two short-lived, government-stimulated recoveries, there were no such sources of support.

By far the most striking comparison is with 1929. Then, a sample of large corporations still had a short-term liquidity index of 68 per cent — 68 cents in cash for every dollar in short-term debts. In 1975, it was only 10 cents. In 1929, the Federal Government had a liquidity, vis-a-vis other nations of 147 per cent ($1.47 in gold and reserves for every dollar of liabilities held by foreigners) and could retain the option of taking an active role in the economy. In 1975. this ratio declined to an all-time low of 14 per cent. In 1929 the average liquidity ratio of the major New York banks was 36 per cent as compared to 33 per cent in November 1974. The depositors' equity ratio at all banks and thrift institutions was 24 per cent in 1929; 13 per cent in 1974. And most important, the danger of interest-bearing demand deposits — one of the major factors behind the bank failures of the 1930s — was being repeated in 1974 through the use of short-term liabilities to back 50 per cent of loans and investments at New York banks.

There were also new elements in the Great Money Panic, the most striking of which was the speed of events. Through mass communication facilities, the public was bombarded with highly edited, prefabricated information packets, which effectively plugged them into the system like a crowd of spectators in a Roman coliseum. Then by way of computerised polling, the mass audience alternately turned thumbs up or down on the actors in the economic and political arenas; battling first against inflation, then against high interest rates, and finally against rapid deflation caused by the dumping of an avalanche of commodities.

But there were also differences between 1929 and the Great Money Panic on the positive side — fundamental cultural changes that permeated most of Western society. Apparently people simply were more sophisticated and more tolerant to rapid change. In the late 1960s, they had been through most of the social upheaval before the economic downfall. They were ignorant of the future, but highly educated in the lessons of the past.

The big crash

When the government-engineered recovery failed to materialise, and the stock market rally collapsed, events moved so swiftly that for years thereafter historians struggled to piece together the actual chain of events. Apparently tne government had been the very last hope. When that hope was squashed, all efforts at co-operation were junked and it was every man for himself. Headlines in which Ford, Greenspan, Simon, Burns and others appeared as the subjects gave way to a new breed of headlines in which the events became the subjects and people the objects: FINANCIAL PANIC WOUNDS CHRYSLER. PRICE DEFLATION SURPRISES WHITE HOUSE. BANKRUPTCY WAVE HITS UTILITIES.

First it was the housing and construction industry. Then it was the airlines. Next came the cry for help from the big three in Detroit, followed closely by the electric equipment manufacturers, the utilities, and even the big oil companies. Within six months after the first days of the panic, 15 per cent of Fortune's top 500 corporations were clamouring for ."rescue loans" from the Federal Government.

A Congressional committee estimated that to satisfy all the demands from giant corpora tions, close to $40 billion in government-guaranteed loans would be needed. But the most anyone could squeeze out of the banks, including international and Arabbacked consortia, was $7 billion, meaning that only about one out of six could be saved. 'We must first decide,' said one conservative senator, 'if we are embarking upon a life-saving mission or a ship-wreck salvage mission. The former would be like a mission impossible and the latter more like a wild-goose treasure hunt. I'm afraid we'll have to let them fend for themselves. Otherwise the nation's credit will evaporate and our chances for a genuine recovery will be hurt.' Another senator, somewhat less conservative, came up with a proposal for rescuing one 'special case' in each industry. Unfortunately, every company claimed that it qualified as a 'special case.' It was no use. Business transactions were decelerating sharply. Bank debits soon fell 50 per cent to an annual rate of $11 trillion; new private credit virtually disappeared; and GNP was off at an annual rate of 30 per cent. Most astonishing of all, for the first time since 1932, private corporations showed a net quarterly loss, rather than a net profit — approximately $3 billion per month.

General Electric was in deep financial difficulties. Westinghouse was in deep financial difficulties. Goodyear Tyre and Rubber, Chrysler Corporation and International Harvester were in deep financial difficulties. Ditto, General Telephone and Electronics; Consolidated Food and Esmark; Con Edison, Florida Power and Light and ComnSonwealth Edison; Pan American Airways, Trans-world Airlines and American Airlines . . the list grew daily.

No matter how many corporations were saved by the government, there were still millions of bankrupt partnerships, families, churches, universities, foundations and cities. Corporate bankruptcies soared from 0.4 per cent to 4 per cent; delinquencies on bank loans went from 3 per cent to 20 per cent; and personal bankruptcies from 0.4 per cent to 5 per cent. One out of every two major cities was having difficulty meeting payroll. Two out of every three universities began to consider closing down for the semester.

The stock market was a living inferno with thirtyand forty-point declines in the Dow Jones industrial average in one day. In the bond markets, expressions such as 'fiasco', 'blood bath' and 'massacre' just weren't strong enough. In one dealer's words: 'What do you call it when government bonds fall three full points in one day and when corporate bonds fall ten points? It's absolutely uncanny.'

In one day there were so many production cuts and layoffs that the newspapers had to list them like battlefield casualty reports. PRODUCTION CUTS ANNOUNCED: CHRYSLER, 60 PER CENT; GENERAL MOTORS, 50 PER CENT; IBM, 20 PER CENT. The biggest layoffs came from Detroit's top three — Ford 225,000 General Motors 250,000, Chrysler 95,000. In the electrical equipment and utility industry, 150,000. The steel industry, which apparently had been doing very well only weeks earlier, laid off over 200°,000.

The massive layoffs led to an equally massive cash squeeze on the American consumer, precipitating a wave of selling — used automobiles, appliances, hoarded coins, antiques, homes — anything which could bring quick cash. This in turn led to panic prices and one of the steepest falls in consumer prices ever. recorded. Slightly used luxury automobiles could be bought for a little over $2,000. Large colour TV sets, which had been selling for as much as $500 per unit, were available for $100. Mountains of vacuum cleaners, refrigerators, furniture and photographic equipment were marked down 50 per cent or more. Even gold and silver hoards were dumped in order to save near-bankrupt individuals and institutions.

In short, thirty years of accumulation and hoarding were compressed into six months of panic selling. Fear of inflation gave way to the terror of insolvency.

The false bottom

As prices plummeted, the question most frequently asked was: 'When is this nightmare going to end?' When the Dow Jones punctured the 400 level, some people thought they had tne answer. A Wall Street bear sent out a newsletter announcing in bold red type: THIS IS THE BOTTOM. It was very impressive. But it was not the bottom, not by a long shot.

The news of bankruptcies continued to pound away at the market — the banks, the cities, the multinationals, and even some foreign governments. Some of the big British and a few New York banks that had loaned eurodollar oil money to Italy, France, Britain and others were now being squeezed, as depositors of the eurodollars wanted 'out', Cities like Newark, Cleveland and New York were urgently requesting funds to carry on. The great ITT communications network was faced With major financial problems. The Federal Reserve plunged head-long into Franklin National-type rescue operations, pumping $31/2 billion into the big city banks and $P/2 billion into regional banks. But funds which were Poured in from above simply spilled out from below. Mass withdrawals were under way.

At the big city banks, withdrawals hit from two sides. On one side, their own depositors and CD holders wanted their money back. This was to be expected, and the Fed worked with the banks to cushion the blow wherever possible. Withdrawals from the other side, however, were totally unexpected. For some time, the City banks had been counting on federal funds — excess reserves coming primarily from country banks — as a reliable source of short-term borrowing. But when the panic Spread to the small towns, depositors withdrew their money from the country banks, causing the country banks to withdraw the money from the city banks. The city banks were then forced to cash in their investments in cities, states, corporations and the Federal Government.

With this kind of news, investors paid very little attention to the ex-bears who had turned bullish. In one weekend, rumours of an American bank moratorium, of a financial Squeeze on AT&T, and of the imminent bankruptcy of Mitsui, Sony and the Italian government all piled up. When the market opened at 10 am Monday morning, the Dow Jones industrial average had dropped twentyfive points. The stock market ticker was delayed two hours and by the end of the day the market was down 20 per cent. Forty-five million shares were traded, with over 1,150 declines,less than 200 stocks unchanged, and no advances. It was later called "Money Panic Monday".

Bouncing on the bottom

Stock prices collapsed. Corporations and governments collapsed. Banks collapsed. The market system, however, did not collapse. Because of the bad experiences with the back-office paper deluge in the late 'sixties, the brokerage industry was fully computerised by the time the Great Money Panic arrived. No matter how much money the brokerage companies were losing, the computers continued to allocate the supply and demand for securities with efficiency and dispatch. The computer saved the day for the stock exchanges in Western society.

But in those days very few people paid much attention to the "system". All eyes were glued to the Dow Jones industrial average: 400-300-200-. Finally, it happened. The Dow Jones industrials hit rock bottom. The week before, Harry Schultz, the California newspaper owner turned investment adviser and gold bug, reprinted one of his old graphs from his 1970 book, and voila. There it was—a trend line stretching all the way back to 1789, which predicted that, if a crash were to occur in the mid-'seventies, it would probably bottom out somewhere near the 200 level on the Dow Jones industrial average. It fitted almost perfectly with events in the marketplace, and it was indeed the bottom of the market.

It was not, however, the end of the panic.

Governments all over the world were coming out with announcements to rally their economies. France: "It's time for all citizens of the Republic to reinvest their confidence in their country.' Britain: "The real recovery will soon begin.' Japan: 'Reconstruction will be swifter and smoother than after the second world ear.'

Unfortunately, very few people had any savings to 'reinvest'. There was, however, a 'liquid minority' — individuals and small, institutions, that managed to stay out of stocks, bonds and other commitments throughout the decline. While the bulls of yesteryear were preaching gloom and doom, these investors had visions of getting in on the ground floor and becoming the new owners of America. They got IBM, which had sold as, high as $366, for $30; they paid $15 for AT&T, which had sold for $70.

In a matter of weeks the prices of key stocks nearly doubled and the new generation of bulls leaped for joy. But the 'liquid minority' failed to predict that many institutional investors, banks in particular, still owned relatively large amounts of stock in their trust portfolios and would take advantage of such rallies to liquidate huge blocks of securities. They failed to predict that prices would bounce up and down in the greatest whipsaws of the century before a true recovery could get under way.

Moratorium pressures

All of the economic and social institutions of the non-communist world now came face to face with their. day of reckoning. Which ones were solvent, which insolvent? Which ones would go under? Which would survive? These were the questions asked in West Germany, Switzerland, France, Britain, Japan and the United States; in South-east Asia, the Middle East, Africa and Latin America. The answers had little to do with size or power. Instead, survival depended primarily upon the degree of liquidity reached during the final stages of the superboom and upon the swiftness of protective action taken in the early stages of the bust. Most of those that built cash reserves early in the game came out alive and kicking. Most of those without a build-up of cash reserves were taken over or ceased to exist. In short, the world economy needed a rest, a cease-fire from the accelerated bombardment of events.

One of the first to feel this need were officials of the American savings and loan industry. A few months earlier, the delinquency rate on home mortgages soared beyond what was later called 'the absurdity threshold', the point beyond .which written contracts, orders, and promises of all kinds lost all practical meaning.

It would have been physically impossible to follow through with the repossession of homes.

Thus, out of secret, closed-door meetings held in the savings and loans headquarters throughout the country came the word 'mora torium' — at first only a whisper, but soon one of the most virulent public demands of all time. Finally, three developments reaching a climax almost simultaneously, forced the

Government to yield to the pressures. First the paper losses suffered by the commercial banks in their investment-and-loan portfolios were rumoured to be $78 billion, leaving a potential capital deficit of about $45 billion! Secondly, the American liquidity crisis was acting like a cosmic black hole — a bottomless whirlpool which sucked dollars, pounds, francs, marks, guilders and yen from the international currency pools in other Western nations.

'How much money are you holding that can be shifted immediately to New York accounts?' shouted the financial officer of an Americanbased multinational corporation in a cross-Atlantic phone conversation.

'Are you kidding?' came the reply from London. 'We need the money for operating expenses. Besides, it looks to me like this dollar rally is a fluke. So what the hell do we want to get into dollars for? The big play is still to come in European currencies, especially the mark.'

'Cock and bull! That's the same story Tokyo gave me. Except, according to them, the big play is in yen, not.marks. You want my opinion on foreign currencies? Well, I don't have an

opinion on foreign currencies. What I do have is a credit crunch, a money squeeze, a liquidity crisis, and I don't give a damn about the dollar crisis. All I know is that our accounts payable have doubled in the last sixty days and our creditors are badgering us daily for the money we owe them. The banks are threatening to call all our loans unless we pay off the current ones. The IRS boys have been cluttering up our offices trying to get us for advance tax payments.'

'So?' came the reply from London.

'So if we can't mobilise this money right now, if you can't get the stuff over here to cover our exposed rear end, we'll all go under, and that includes you, Tokyo, Paris, Sao Paulo—'

Thus began the mass withdrawal qfill.ollars from overseas. And with this withdraW11 of dollars from overseas, the rug was pulled out from under the industrial pyramids in Euro-pe and Japan that had been built around the eurodollar and eurocurrency markets. The value of the dollar, which had been wavering from strength to weakness, finally soared. It mattered little what a few speculators thought about gold. What did matter was the hundreds of billions of dollars worth of skyscrapers, factories and equipment that demanded the lifeblood of billions in cash-dollars to remain functional.

The Swiss franc fell from 40 cents to 28 cents; the German mark from 43 cents to 30 cents. The Japanese yen was equally hard hit and went from 300 yen to the dollar to over 400,yen. The pound literally collapsed and for the first time in history one dollar bought precisely one British pound sterling. It was, however, the threat of a total paralysis of the big American cities which finally swayed the US government to declare an end to the panic.

The mayor of a large city finally got a phone call through to an official in the Treasury Department in Washington.

'What happened to last month's revenuesharing cheque? It was due on the fifth and here it is the tenth already. We need it now, right now. We simply could not wait any longer and we had to mail out last month's cheques to teachers, sanitation workers, the firemen, the policemen.'

'You mean you're giving out bum cheques?'

'No. We still have twenty-four to fortyeight hours before they start cashing them at the bank.'

'Then you haven't heard the latest?'

'Latest? What latest? No. I haven't heard the latest. I've been too busy.'

'The Secretary of Treasury has ordered all revenue-sharing temporarily suspended. Word came down this morning. Some big corporate taxpayers fell behind in their payments and there was nothing else we could do. But you should get your cheque in a couple of weeks.

Five minutes later the mayor hung up. Five. hours later he resigned from office. The masses of city employees went on strike. Their slogan was very simple: 'No pay, no work.' They weren't even bargaining for wage increases. All they wanted was their regular cheques. In the midst of city strikes the banks were deluged with new waves of withdrawals — not just lines, but mobs of depositors who overflowed into the streets with angry demonstrations whenever their money wasn't produced immediately. The nation was on the brink of disaster.

Less than fourteen months after the first day of the Great Money Panic, the President of the United States declared a temporary halt to all non-essential production, transportation, distribution and financial transactions — a banking, production and market holiday. The most powerful economy in the world came to a near-halt.

This series represents only about one tenth of The Money Panic. For a copy of the unabridged book, containing 400 pages and 47 diagrams, as well as a six-chapter survival programme, send a cheque for E7 (add El for air mail) to Weiss Research, Inc., 542 West 112th Street, New York, N.Y. 10025, USA. Interested publishers may contact Abner Stein, 39A Cyril Mansions, Prince of Wales Drive, London, SW11 4HP, tel. 720 7910.