The Great Depression Read online

  The actual diary page.

  CHAPTER 1

  JUNE 5, 1931-OCTOBER 17, 1931

  FOREWORD

  For the first time in my personal business life I am witnessing a major financial crisis. I am anxious to learn the lessons of this depression. To the man past middle life it spells tragedy and disaster but to those of us in the middle thirties it may be a great school of experience out of which some worthwhile lesson may be salvaged. With this thought in mind I am going to write down brief accounts of developments as they occur from time to time.

  JUNE 5, 1931

  Benjamin Roth

  2032 Elm Street

  Youngstown, Ohio

  VOLUME I

  PERSONAL NOTES ON THE PANIC OF 1929

  BRIEF RESUME OF EVENTS PRECEDING THE PANIC 1931

  JUNE 5, 1931

  I was mustered out of military service on December 5, 1918 and returned to Youngstown to open a law office. I found business humming. The return of thousands of soldiers to civil life had brought a boom to real estate, clothing and other retail trades. When I purchased my first civilian suit I found I had to pay $70 for a suit that might have cost half that amount a few years before. Silk shirts with big candy stripes were in style for the men and the usual price was $10 to $12 for an ordinary shirt. In a similar way shoes and other items were expensive. I was amazed to find mill-workers in Youngstown wearing these silk shirts without a murmur. I also learned that during the war and still in 1919 these mill-workers had earned enormous wages—from $10 to $35 a day.

  This feverish prosperity and easy money continued through 1919 and 1920. In 1921 came a steel strike in Youngstown and for awhile it looked as tho we were heading for a depression but in 1922 things picked up again and continued in a hectic spiral upward until the big stock market crash in October 1929.

  As I look back now I can understand how America during the years 1919 to 1929 was called upon to supply the needs of both Europe and America—after five years of wartime destruction. In Europe the industries and railroads had been destroyed and America was called upon to rebuild Europe to supply her returned soldiers with food and clothing and other necessities. At the same time the enormous similar demands of our own country had to be satisfied. I know now—but I did not know it then—America also supplied Europe with the money and credits to purchase our merchandise and we have not been paid back to this day.

  At any rate things began to hum again in 1922. Our steel industries and other factories turned from the making of war material to the making of automobiles, radios, etc. We had a real estate boom and later in 1925 there was a tremendous boom of real estate in Florida. Prohibition was in effect but actually the amount of boot-leg liquor consumed exceeded that before Prohibition.

  As I look back now to the 1922-29 period it seems to me unreal and almost unbelievable. After the war pressure people wanted to have a good time and to spend money. The flapper appeared upon the scene. Women’s dresses became shorter and shorter until they hardly reached the knee and in the latter stages of the delirium they wore their stockings rolled and their bare knees rouged. Morality and religion were pushed into the back-ground and in its place came Negro jazz bands and night clubs and all its attendant evils.

  To an older man it must have seemed inevitable that we were heading for a crash but to most of us it seemed that we were in a “New Era” which would never end.

  On the industrial side of the picture, mass production led to the formation of larger and larger mergers. We began to hear of stock market millionaires, huge extra dividends, stock split-ups, and 99 year leases in real estate, shoestring financing and all manner of speculation.

  In my own law business I began to feel a change in 1924 but did not know what was happening until several years later. My practice dealt largely with independent merchants. In 1924 these independent merchants began to be replaced by chain stores. The A & P and Kroger grocery stores probably put over 1000 merchants out of business in Youngstown. Today almost every building on Federal St. is occupied by a chain store. For many of these independent merchants I performed one last rite—bankruptcy—and never saw them again. In this way I lost considerable legal business because these independent merchants had been a substantial group of citizens owning real estate, etc. As for the chain stores, their legal business and banking was done in New York or Chicago and the local lawyers and banks gained nothing by the change.

  In a similar way beginning in 1924 real estate and building transactions became fewer and fewer. An experienced economist might have recognized all these signs but to most of us it meant nothing. We believed in the New Era and were not going to sell the U.S.A. short. Dictatorship, Communism and Socialism might rear its head in Europe but we were sure in those days that none of those things could come to America.

  Businesses in downtown Youngstown, Ohio, still appeared to thrive in 1930 and would not feel the full effects of the Great Depression for another year. (The Mahoning Valley Historical Society)

  The picture would not be complete without a word about the stock market. Before the war the average man knew nothing about stocks and bonds and the stock-market was something he had read about in connection with Wall St. propaganda. The average man who wanted to invest or speculate used real estate as a medium and it was still considered a truism that the most sure way to build a fortune was through the ownership of real estate. I believed this and my parents believed it but my faith has been considerably shaken by what happened to real estate and mortgage investments since the depression.

  During the war people bought Liberty Bonds from the government under high pressure propaganda and after the war when they sold these bonds many of them for the first time entered a stockbroker’s office. Many holders of Liberty Bonds did not even know how to sell them and after the war “Liberty Bond Scalpers” opened offices, advertised and purchased these bonds from ignorant investors at discounts ranging from 25% to 50%. The scalper then sold these bonds on the market at par and with the money scalped some more bonds.

  Without being able to explain it the fact remains that after the war people became stock-market conscious. Much publicity had been given to war babies (stocks of companies that made war supplies and paid huge dividends) and from 1922-1929 it seemed as tho every man, woman and child had determined to make a fortune by “playing the market” on margin. In 1929 when the crash came all sorts of people were into the market on margins over their heads—doctors, lawyers, merchants, bootblacks, waitresses, etc. They bought stocks on tips, did not know what the company sold or made and did not know how to investigate a stock even if such a thought had occurred to them.

  EDITOR’S NOTE

  Entering the stock market had become a lot cheaper by the 1920s. In the mid-nineteenth century, industries that required massive amounts of capital, like the railroads, raised money by dividing up the ownership of a company into shares. But in the early twentieth century, and especially after World War I, all kinds of enterprises needing money to fund their operations began splitting their stock shares into smaller and smaller amounts so more Americans could afford the opportunity to “own” a part of a company. Furthermore, cheaper “common stocks,” stocks with no guaranteed return if the company wasn’t profitable, gained popularity in the 1920s. They carried higher risk, but they were also less costly than “preferred” stocks, which generally guaranteed investors a dividend paying 6 to 8 percent return a year. Many buyers of these common stocks were speculators who would snatch up “bargains” that were traded enough to drive up their price. When the sales of these common stocks rose too high (sometimes, twenty to forty times their earnings), the stock was split into smaller shares (within the $10 to $250 range), so as not to price out even more potential buyers. To today’s investors, these are everyday occurrences, but in Roth’s day they were innovations whose full impact was not yet widely understood; IBM, for example, first began paying a dividend in 1925, and had its first stock split (three to one) in 1926.

  By
summer of 1929 stocks were selling at twenty, thirty and forty times their earnings. Stocks were split and re-split until the most capable accountant would have found it difficult to make a reasonable calculation. All sense of caution was lost, stocks were bought blindly and good bonds earning 4% or 5% were sneered at. Even tho the air was full of warnings, very few people took heed and when the crash came in the fall of 1929 the casualties were terrific. Many of my friends with small earnings had run up stock-holdings on margin as high as $50,000 or $75,000. The crash wiped them out and in many cases left them indebted to banks and brokerage houses. I visited a stock exchange on the day following the crash (my first visit to one) and the place was filled with perspiring and white-faced people. Suicide and bankruptcy became the order of the day.

  Following is a list of some of the stock market quote shares just before the crash:

  Am T & T. 310 1/4; Atcheson, Topeka & Santa Fe 298 5/8; Bethlehem St. 140 3/4; J. J. Case Co. 50; Central R.R. of N. J. 360; Coca Cola 344; Detroit Edison 385; Eastman Kodak 284; General Motors 91 (after many split ups); New York, Chi & St. L. RR 192 (later went down to 1 1/2); Peoples Gas 404; Radio 114 (after many split-ups—later down below 10); Truscon 51 1/2 (later below 10); Union Pacific RR 290; U.S. Steel 262 3/4; Western Union 272 1/4 (later lost about 90%); Youngstown Sheet & Tube 175.

  At the present time (June 5, 1931) some of these stock quotations have dropped to the following:

  Truscon 61 5/8 to 12; Republic 140 to 12; AT&T 310 to 170; U.S. Steel 261 to 84; Sheet & Tube 175 to 43.

  Immediately after the 1929 crash the speculators rushed in to buy “bargains” but were badly mistaken because the market kept going down and down even tho industrial leaders kept on assuring the people that everything was fine and the worst was over. At the present time the newspapers are urging people to buy these “bargains” but opinion is much divided as to whether or not the bottom has been reached.

  What has happened to date (6-5-1931) in real estate and mortgage investments

  Investments in real estate and mortgages fared almost as badly as stocks. Since 1929 foreclosure by the banks has been the order of the day.

  Day after day real estate can be bought for the price of the 1st mortgage and there are no bidders except the bank which holds the first mortgage. In this way the banks are becoming the holders of huge quantities of real estate.

  Most property bought in the last few years was bought subject to a large first mortgage and in many cases subject also to a second or third mortgage. In case of foreclosure the owner not only loses his property but is also subject to a large deficiency judgment. In this way many people have lost all.

  The worst feature about real estate in a depression is that it is illiquid and cannot be sold at any price. If it is free of mortgage the owner may hold on until normal times—but in most cases it is subject to mortgage—he cannot collect his rent from the tenants—and cannot pay on his mortgage or taxes and eventually loses his equity by the foreclosure route.

  It is almost impossible to collect real estate rentals. Taxes and repairs are high, banks are calling their loans and are terrible if interest is not paid promptly—and the real estate owner has a difficult situation to face.

  Second Mortgages

  During the boom years it became popular to buy real estate at inflated prices on a shoestring. This was done by encumbering it with a 1st, 2nd and 3rd mtge. Second mortgage loan companies were formed to buy these 2nd mortgages at a discount of 10% to 25% per year. It has proven to be a bad investment because at each sheriff sale the 2nd mortgage is wiped out. Most of these companies have frozen assets and seem to be heading for bankruptcies.

  Good, conservative first mortgages have proven to be good investments altho’ in many cases the mortgagee has been forced to take over the property.

  The sheriff has been selling recently at public sale many vacant lots on which accumulated taxes amount to $500 or more. At these sales the lots are selling as low as $25 apiece clear of taxes. One of my clients bought ten of them ranging from $10 to $50. Of course they are mostly located in undesirable neighborhoods. Another client had 10 buildings razed because he could not collect rents and the taxes are exorbitant. This is a popular way to reduce taxes.

  Here as elsewhere there are lessons to be learned and I am very much confused. Where can a person safely invest—in real estate, stocks, bonds? The constant supervision required by real estate, the costly upkeep, its illiquidity, the danger of a deficiency judgment—all have cooled me considerably. I begin to realize that changing business conditions and the growth of the country make almost essential a knowledge of stocks and bonds—not for the purpose of speculation but to preserve principal and to get a fair return on the investment.

  2/12/36

  I am re-reading this. These early buyers were badly mistaken and many of them were wiped out. The market reached bottom in the summer of 1932 when Truscon sold at 2; Sheet & Tube 4; Republic 2; U.S. Steel 23; AT&T 73 etc. After the summer of 1932 a slow up-turn began. Prices today (2/12/36) are Truscon 9; Sheet & Tube 51; Republic 25; AT&T 165 etc.

  In the last analysis however the rules of conservative investment apply whether you buy real estate or stocks or bonds. Thorough investigation is the first necessity—safety of the principal—and it usually follows that only a fair return on the investment can be expected. To seek a high or unusual return means greater risk and speculation. This was true of 2nd mortgages on real estate which brought a return as high as 20% but in the end proved worthless. A pretty safe rule to follow is to stick to the conservative investments. There are times, however, in a depression when cash money is king and many good investments can be purchased at a big discount.

  JUNE 15, 1931

  Stocks continue to go lower and lower and dividends are being slashed right and left. For over a year now people have been buying stocks at what they think are bargain prices. These prices are much below 1929 but there is no way to tell if they have reached bottom. Some present day prices are: Sheet & Tube 43; Truscon 13; US. Steel 83. Only the blue chip stocks are still high: AT&T 170; G.E. 42; Consol. Gas 95 etc. It seems there should be no rush to buy bargains in a panic. The opportunities are many and the period is often protracted. The best time to buy of course is when the panic is almost over. My guess is that we haven’t seen the end yet.

  JULY 30, 1931

  Magazines and newspapers are full of articles telling people to buy stocks, real estate etc. at present bargain prices. They say that times are sure to get better and that many big fortunes have been built this way. The trouble is that nobody has any money. On account of numerous bank failures, the few people who have money are afraid to spend it and are buying government securities. From the extreme of speculation in 1929 people have now turned to the extreme of caution. In my own case I find it a problem to take in enough to pay expenses and there is nothing left for investment.

  5/16/32

  This advice was premature. Here a year later prices are 1/3 of what they were in 1931.

  EDITOR’S NOTE

  The collapse of so much commercial activity strained the banking system in the United States and abroad. Banks had overextended their loans, and the rate of nonpayment was putting pressure on the supply of gold. In December 1930 the Bank of the United States (a private bank with no actual government status) collapsed in what was the largest bank failure in U.S. history at the time, freezing some $200 million in depositors’ funds. Similar collapses took place in Austria and Germany in mid-1931. Because the world banking system is always interconnected, and because world currencies at the time operated on a gold standard with only a finite amount of gold in the world, it was inevitable that these failures would hit very close to home for Roth and his neighbors, with devastating effects on businesses and the real estate market. By the time 1931 came to a close, several major countries had been forced to take their currencies off the gold standard, a development that Roth would come to view with increasing alarm. In addition, a worldwide crate
ring of prices on commodities—coffee, cotton, rubber, and wheat had all fallen more than 50 percent since the stock market crash—destroyed the farming sector, bringing food prices to absurd lows, but still not low enough for the jobless to afford.

  AUGUST 5, 1931

  The town is stunned by the news that the Home Savings & Loan Co. has suspended payments and would demand 60 day notice of withdrawals. This is followed quickly by similar announcements from The Federal Savings & Loan Co. and The Metropolitan Savings & Loan Co. All of these loan companies paid 5 1/2% on savings deposits and earned their money by lending on real estate. With the coming of the depression people stopped payments on their mortgages—mortgages became frozen and the banks had no way to get cash. Mortgages are a safe investment but cannot be liquidated quickly and are not a good investment for a bank which has agreed to pay out its deposits on demand. For the past three days, these institutions have been besieged by hysterical depositors demanding their money. I am only afraid the banks will become more stringent in their collections and that foreclosures will become the order of the day.