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Posted on 14 April 2011 | 4,972 views

Commodities Crash With US Banking Panic of 1932-1933

By August of 1931, Keynes estimated that “Commodity Prices” on the world market had fallen since 1929 by an average of 25%, with some commodities falling as much as 40 to 50%. Common stock shares had fallen worldwide by 40% to 50%, he reckoned.

Investment-grade bonds were down by only 5%, but lower rated bonds were down by 10% to 15%, and the bonds of many governments had “suffered prodigious falls.” When it came to real estate, the picture was more differentiated. Great Britain and France had been able to maintain relative firmness in real estate values, with the result that “mortgage business is sound and the multitude of loans granted on the security of real estate are unimpaired.

The “Worst Real Estate Crash” had occurred in the United States, Keynes found. Farm values had suffered a great decline, and newly developed urban commercial real estate was depressed to 60% to 70% of its cost of construction, and often less. Finally, Keynes estimated that the commercial loan portfolios held by banks were in the worst shape of all. Keynes evaluated this 2-year collapse as the worst world-wide deflation in the money values of real assets in history.

Keynes pointed especially to something far worse yet to come, namely the potential world banking crisis that was implicit in the price collapses he had summed up. He concluded that in most of the non-British world, if bank assets were conservatively re-evaluated, quite a significant proportion of the banks of the world would be found to be insolvent; and with the further progress of Deflation this proportion will grow rapidly.

London had the least to worry about, since “fortunately our own domestic British Banks are probably at present – for various reasons – among the strongest.” Once again the Americans would bear the brunt of the crisis.

In the United States, the position of the banks, though partly concealed from the public eye, may be in fact the weakest element in the whole situation. It is obvious that the present trend of events cannot go much further without something breaking. If nothing is done, it will be amongst the world’s banks that the really critical breakage’s will occur.

During October, 1931, the British default had provoked a flurry of bank failures worldwide:the Comptoir Lyon-Alemand closed; Handels Bank of Denmark needed to be bailed out by central bank, the Bank fuer Handel und Gewerbe, Leipzig, suspended payment, as did the Dresden Volksbank, the Franklin Trust Company of Philadelphia and 18 smaller US banks.

The central banks were so strapped for cash that there was a run on the Bank for International Settlements, which had to sell great masses of its own assets assets in order to meet the cash demands of its members, the central banks.

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