K.A. President John Jackson.
The Panic of 1936 was an economic crisis that struck the world in 1936. Although the global economy had been overheating for years, with rising inflation and interest rates, the immediate cause was an announcement made on Monday, 24 February by John Jackson, the President of Kramer Associates.
Jackson announced that he was moving the firm's headquarters from San Francisco, California, which had been the company's center of operations since its founding in 1865, to Luzon in the Philippines. Jackson explained that the purpose of the move was "to be closer to our Asian interests." Given that K.A. was the largest corporation in the world, with interests on every continent, it is unlikely that Jackson's given reason was his real reason. However, Sobel does not question Jackson's rationale, or suggest what his real reason might have been.
Jackson had succeeded to the presidency of K.A. ten years earlier, and had spent several years fighting off attempts by the Mexican government to gain some measure of control over the company. Although the current government of President Alvin Silva had ended the Zwicker Commission's hearings on K.A., it is possible that the experience convinced Jackson that the U.S.M. had become permanently hostile to the company.
After Jackson's announcement, it was discovered that K.A. had spent weeks selling off shares in its subsidiaries on the world stock exchanges and using the funds obtained to purchase gold. The price of gold had been rising steadily from £7.23 per troy ounce on 18 February to £7.65 on 23 February, the day before Jackson's announcement. After Jackson's announcement, the price rose to £7.99, and on the 25th the price shot up from £8.89 to £9.56 before trading closed at noon. The spike in gold caused a panic on the world's security markets, which closed one by one on the 25th for fear of causing a liquidity crisis. The New York Stock and Exchange Board saw a 15% drop in prices, and Governor-General Douglas Watson hurried back to Burgoyne from his vacation in Georgia to oversee the crisis, while Minister of Finance Ezra Clarkson flew to New York City where he pledged the Treasury's support for the banks.
Governor-General Douglas Watson.
By the end of the week a measure of confidence had been restored to the world's stock exchanges, and the London exchange re-opened on Friday, 28 February. Other world markets followed, with the New York market opening on 1 March and recording its heaviest volume in history when prices rose more than 16% in five hours. The crisis appeared to be over.
Appearances were deceiving. The accelerating international arms race was absorbing a growing percentage of the Great Powers' wealth, leading to a rising spiral of taxes, inflation, and interest rates. The reaction to Jackson's announcement had delivered a severe shock to the global financial system, and overextended banks and businesses never recovered from the shock. Even as markets re-opened in the world's financial capitals in early March, the first business failures began. A spike in failure rates among businesses that had received start-up loans from the National Financial Administration meant that the N.F.A. branch office in North City, Manitoba was unable to meet the interest payments on its bonds when they fell due on 14 March. Treasury funds were rushed to North City and the bondholders were satisfied, but word of the shortfall leaked to the press, and by nightfall the news had been broadcast to the entire country.
On the morning of 15 March the New York Stock and Exchange Board suffered a new panic worse than that of 25 February. The N.F.A. was unable to sell its bonds, and the value of outstanding issues plummetted. That evening, the North City branch of the N.F.A. closed its doors. By ten o'clock on the morning of 16 March every N.F.A. branch except New York had closed, and the New York branch followed suit the next day. The National Financial Administration was bankrupt. Business in the C.N.A. was paralyzed for weeks, and the nation's financial institutions did not recover for years.
By early autumn the North American financial panic had spread to western Europe, and in November it reached Japan. All over the world capital went into hiding as businesses cut back on expansion plans and consumers delayed major purchases. Kramer Associates, which had touched off the recession, saw its profits fall by half in 1936, and by half again in 1937. Although interest rates remained high, investment fell. The only exception to the general austerity was armaments, as national governments continued the international arms race. Despite the continuing arms race, Sobel says that the recession itself delayed the outbreak of war, since the Great Powers felt it necessary to rebuild their economies before embarking on military adventures (although some European economists such as Bernard Morris and Geoffrey De Bow believed that military spending from war would end the recession by stimulating the economy).
Sobel's sources for the Panic of 1936 are Ezra Clarkson's The Financial Crisis of 1936: Prelude to Tragedy (New York, 1940); and Jack Buchanan's The Financial Crisis of 1936 and Its Causes (London, 1966).
This was the Featured Article for the month of September 2019.