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Quote of the Day
“It was a short inferential hop to the conclusion that the Fed was now running monetary policy for the express purpose of bailing out Citi in particular, the banking system in general, and Wall Street in toto.”
-Jim Grant, in his book: The Trouble With Prosperity: The Loss of Fear, the Rise of Speculation, and the Risk to American Savings
On this day the Federal Reserve took a unprecedented step of lowering interest rates 1 full percent in response to the Savings and Loan Crisis. Many saw the Fed’s actions targeted towards as a bailout to a few specific banks. (Remind you of 2008-2009?)
More in our “This Day in History” below:
December 20th – This Day in Stock Market History
December 20th, 1971 – U.S. dollar devalued 8.57% overnight. Gold/dollar conversion price raised to $38 from $35 an ounce.
New York Times coverage of U.S. Dollar devaluation in 1971
In August of 1971 Nixon announced a suspension of gold payments for dollars and a 10% surcharge on imported goods.This was leading to a weakening dollar, and therefore many currencies of other countries strengthening.
Many countries were forced to act individually to control the exchange rate of their currency, and international payments were being affected. As the worldwide flight from dollars continued, the U.S. deficit rose sharply, from $4.7 billion in the first quarter of the year, to over $12 billion by the third quarter of 1971.
This announcement of a U.S. dollar devaluation was part of an agreement with other countries in an effort to stabilize the international currency markets. The U.S. dollar would be devalued by 8.57% overnight, and the 10% surcharge on imported goods would be removed.
For those interested in more detail on the economy in 1971 and what led to the dollar devalue on this day in 1971, check out our ‘Read of the Day’ at the bottom of the article, which is the New York Federal Reserve’s 1971 annual report.
December 20th, 1991 – Federal reserve drops interest rates 1 full percent, down to 3.5%, to help S&L crisis.
Before the Fed’s actions, banks were struggling as real estate loans turned sour and junk bond issuers began to default. Citi in particular was feeling the pain. The stock was at an 11 year low, and in October the company had stopped paying a dividend altogether. By lowering short term rates, the Fed hoped to increase banks’ margins as banks tend to borrow at short-term rates and lend at long long term rates.
New York Times Coverage of The Federal Reserve’s rate cut
This cut in interest rates was just one of 24 times that Chairman Alan Greenspan would cut interest rates. Low interest rates helped fuel the bull market of the early 90s, and many believe led to the tech bubble and housing bubble years later.
Source: Bull!: A History of the Boom and Bust, 1982-2004
We have a review of Bull!, one of my favorite Wall Street history books, here: Bull! 3 Lessons From the Tech Bubble
December 20th, 2001 – Argentina defaults as the country falls into chaos.
Wall Street Journal Coverage of Argentina’s default
It was a grave period of Argentina. Most of the government had resigned, there were large scale protests, banks were limiting withdrawals, and the country was still in the midst of a 4 year long recession.
Argentina had pegged its currency, the peso, to the dollar after experiencing hyperinflation in the 80s. The peg gave the country a more stable currency, but handicapped it’s ability to control monetary policy.
Protests were so bad on this day in 2001 that the president had to escape his residence via helicopter to get away from the riots after resigning.
Of course, Wall Street has a short memory with these things. In June 2017, Argentina sold $2.75 billion in 100 year bonds at a yield of 7.9%.
Best December 20th in Dow Jones Industrial Average History
2011 – Up 2.87%, 337.32 points.
Worst December 20th in Dow Jones Industrial Average History
1929 – Down 3.96%, 9.53 points.
Read of the Day
1971 was a defining year for the U.S. economy. The country would end the Bretton Woods system and turn to a fiat currency instead of a gold based one and wage and price freezes were instituted to curb inflation.
The Federal Reserve’s annual report of 1971 is a fascinating read for those learning about monetary policy, and history buffs alike:
Federal Reserve Bank’s 1971 Annual Report
<– Go To Previous Day: December 19th: 1929 – The Dow crosses 200 for the first time, 23 years after crossing 100
