Butch Cooley Comments (Butch is founder of Leg Up House and the Butch Cooley Worldwide Hunting and Fishing . He has been an active trader for decades.)

Great Depression:  Part 1


I wanted to write something a little different this week.  It will probably be in 3 parts over the next 3 weeks.  As most of you know, I don't think we are in "Recession".  I believe we are and have been in a depression since the end of the 3rd quarter of 2008.  I truly, do not believe our economy will improve significantly for many years.  We really messed it up this time around.  Big Time!!  The stock markets will go up and down, and we will have some great rallies, and we will retrace.  And money will be made and lost.  Eventually we will all agree that a bottom was struck at some point.  But Stress Tests don't mean anything.  Banks are not making money, and they can't figure out what to do with their debts.  They aren't lending, heck, they can't lend.  The only reason banks are solvent at this point is Treasury is pumping money into them.  TARP!!  Housing is not getting better.  It is getting worse, and it will get worse for a long time yet.  Foreclosures will continue.  Unemployment maybe be decreasing, but it is still serious, and it will continue to cause havoc with the economy and the GDP.  Businesses are not doing well and this has a devastating effect on the economy. Chrysler in bankruptcy and GM about to go there just is not a good thing. Money is not moving, let alone moving with any degree of velocity.  Eventually, it will all work itself out, I think it will.  I hope it will.  But "things" will not be the same.  Most likely  "Things" will  be different from here on out. 

I have been doing some research on the Great Depression of 1929.  I'm not Ben Bernanke, and not an expert on this.  I'm a fly fisherman and an investor. But there are some similarities to then and now.  But there are many differences too.  I don't think we are destined to repeat history, but we do have a tendency to repeat errors. Greed and Fear errors seem to repeat often in history.   We may very well have repeated some of the errors of pre-Great Depression Era in the last few years.  So I thought it would interesting to share some of the information I found.  I found it intriguing .  And I hope you do to.

I decided to look into the 2 years leading up to the Great Depression, to see what things were like.  In this writing, I am only dealing with the economy, the markets, oil/energy, autos and some businesses.  And I will run through 1931 (5 years) in Part 1.

1927

"Things" were pretty good. The economy was booming, people were making money.   The world was a smaller place, but also it was a place of business, much as it is today.  Calvin Coolidge was President.  And on August 2, 1927, he issued a statement saying he was not choosing to run in 1928.  And that is all he said, and from what I could find out, he never issued another statement on the matter.  Nor did he run for President again.  I wonder if he just didn't want to be President, or if he could see bad times on the horizon, and didn't want to be President?

Earlier that year, on May 13th, Germany's economic system collapsed.  Remember Germany was still coming off the effects of loosing World War 1.  It was known as "Black Friday".

The average income in the US was about $1,000.  That was under $20 a week.  Wow!!  Middle class families had incomes of about $3,000, and middle class was not a big group yet. 

Labor Unions were a real pain in the butt to big business.  In late November, in Columbine, Colorado, police were ordered to use machine guns on striking mine workers, and they killed 5 and wounded 20.  Striking was considered illegal.  And UN-American.

The DJIA closed on December 31, at 202 pts, up from 157 at the end of 1926.  It had been a really good year for the Dow.  It was a very prosperous time period in our history.

JC Penney was still alive, and he opened his 500th store in 1927.  He decided to take the company public, and was listed on the NYSE in 1929, and he had almost 1,500 stores by then.

Sears and Roebuck sent out 15 million copies of their catalogs.  In 1927 virtually every rural American household had a copy of the Sears Catalog and Montgomery Ward catalog.

And 7-Eleven, opened it's first store in Dallas, Texas.  This was part of the new company named Southland Corp.  In the next 70 years, the number of 7-11's grew to over 16,500, most of them franchisees.  They sold gasoline, beer, soft drinks, candy and some food, very much like today.

Schlumberger Ltd figure out a way to accurately measure an oil well depth on Sept 5th, using an electrical-resistance log.  They are still in business and still measuring the depths of wells.  I'm sure they are using new technology. 

A group called Iraq Petroleum Ltd, which was a cartel of French, British and US investors, and of course Iraq, had a major oil strike in Kirkuk, in northern Iraq.  It was a "gusher" and it took the drillers 10 days to get the oil under control.  For those 10 days, the well gushed oil over 140 feet in the air, 24 hours a day, at an estimated rate of 80,000 barrels per day.  Today, that would be "eco-catastrophic"!!

Phillips Petroleum went to "Phillips 66", taking the number from US  Hwy Rt 66. 

 
1928

Another good year for America and for the markets.

A.P. Giannini, owner of the Bank of Italy in California, bought Bank of America, and consolidated it in with his other bank holdings, making his bank the largest banking institution in America.  On November 30, 1930, he dropped the Bank of Italy name and went with Bank of America.

Herbert Hoover decides to run for President, against Al Smith, a democrat from New York.  The only decent quote I could find from Hoover at the time was, "We in America today are nearer the final triumph over poverty than ever before in the history of any land."   He apparently was wrong.  We hadn't even seen poverty yet!!  But he didn't know that.   Later it would be disclosed that Smith had been taking funds illegally (and stocks) that totaled around $400,000 from the National Democratic Party, particularly a fund raiser named Chadbourne.  This had been going on since 1923 when Smith was governor of New York.  Hoover won, Smith most likely went to jail.

The DJIA closed on Dec 31, 1928 at a new high of 300 pts.  RCA stock had gone from 85 to 428, DuPont from 310 to 525, Montgomery Ward from 117 to 440 and Wright Aeronautic went from 59 to 289.  It was the year that corporations and investment trusts began to lend money to stockbrokers for "speculation".  America had also started buying on time.  The beginning of the revolving installment plan.  Credit!!

JP Morgan took over the Marland Oil Co in 1928.  Marland was sort of a wild type I guess, spent a lot of money, built a huge mansion, some 55 rooms in Oklahoma.  He was a poker player, played polo and had borrowed money from Morgan putting up stock in the oil company as collateral.  Oil prices fell in 1928, and Marland never recovered.  JP Morgan stepped in and took over the oil firm.  It was also the first step in becoming Conoco.

Oil consumption in the US reached a rate of 7 barrels per person, and the rest of the world averaged about .2 barrels per person.  The Oklahoma City Field #1 Foster Well came in on December 28th.  It was significant because they had been drilling in the county in search of oil for over 25 years.  They had drilled 25 previous wells, all dry holes. But this well was a gusher, and it produced in excess of 5,000 barrels a day.  It was the beginning of a new era for Oklahoma City and oil production.

Chrysler Motors came out with the Plymouth and also the De Soto.  Plymouth was advertised as a high compression engine with hydraulic brakes, much better than the current cable/mechanical brakes.  Plymouth came in 3rd in sales behind Ford and Chevrolet.  De Soto was billed as the medium price car for America, and Chrysler produced the car until 1960.  They also introduced a new Imperial "80", 112 hp and was considered America's most powerful auto at the time.  Motorcar, excuse me.  We didn't call them autos yet.

Motorola had its beginning in 1928, and amazingly similar to the Microsoft story.  Started out as the Galvin Manufacturing Co, in a brick garage in Chicago.  Paul and Joe Galvin started the company with $560 cash, to make something called a "battery eliminator", which was suppose to allow people to power their radios from household AC current instead of being connect to a battery. 

CBS was founded  by Congress Cigar Co advertising manager Bill Paley. He was 27 years old.  Through a series of investments against his father's advice, he ends up selling all his stock in Congress Cigar to buy United Independent Broadcasters, which also owned Columbia Phonograph.  He kept the company running by selling the last of his stock in Paramount Motion Pictures, and the following year he took CBS to NYC and the rest is history.

GE started the first regularly scheduled television programs in May in Schenectady, NY.  These were definitely "hi tech times"!!


1929

New York financier Paul Warburg, started the year out by  issues a warning in January that sharply criticizes the "present orgies of unrestrained speculation" on Wall Street.  Apparently, no one was listening?
 
New York reports in February that business girls average $33.50 for a 50-hour week.  I am a bit confused here, but I think they meant "hookers".  At any rate, they wouldn't be making that much money for long. 

British unemployment tops 12.2 percent.
. 

Now things start going haywire:

May 4th, 1929, the DJIA closed at 327 points.  Speculators were buying on margin.  Apparently huge volumes of margin.  The Dow drops below 300, but recovers and rebounds to 381 on Sep 3.  A seat on the NYSE sold for an all time high of $625,000.

On October 17, a Yale economist named Irving Fisher issued this statement, "Stocks have reached what looks like a permanently high plateau".  But the Dow breaks in October, following a big drop in iron and steel production in the US.  British interest rate jump to 6.5 percent.  Money from Europe pours out of  the stock market.  The Dow falls 51 pts on October 19 (23%).  It falls 39 points on October 28 (13%) and over 16 million shares, a new record are traded on Oct 29th.  And the Dow drops another 31 pts (12%).  Leading economists are stating that no business recession is imminent.  Apparently they didn't know much more then, than they do now.  On Nov 6th, the Dow drops another 25 pts, (10%), and now margin calls are flying around.  Overnight, $30 billion disappears.   I looked up how much money that really was back then.  In 1929 terms, the US could have paid for the entire costs of  World War I.  It's also important here to realize that about 99% of American owned no stock at all.  The entire crash gets blamed on one guy, Jesse L Livermore, who was a speculator, and reportedly had 30 telephone lines that linked him to various brokerage houses.  But, in reality, Livermore had gone short on the markets back in the summer, a few months too early and he was broke at the time.  So it was not Jessie's fault after all.

70% of Americans had incomes below $2,500.  This amount was considered to be the minimum amount for a decent standard of living.  But most Americans were actually making about $28 a week.  The Crash ended 9 years that had seen unemployment go from a high of 12% to 3.2%.  The economy over all had grown at an annual rate of 3.6%.  The national debt was $16 billion, down from $24 billion.  And the federal budget had been running a surplus every year.  Inflation was below 1%.  But it is commonly agreed the unchecked, unregulated speculation, margin, caused the bubble to burst. 

Conoco is created by JP Morgan.  The world is producing 1.5 million barrels of oil a year, and 2/3s of that is coming from the USA.  Number 2 is Persia and Iraq is number 3. 

GM is headed by Alfred Sloan Jr, and he has taken GM from the brink of insolvency and attempting to create a modern corporation, with an independent board of directors and various finance committees.  Various division in the company are given financial benchmarks that have to be met.  Still no union.  GM also has purchased 80% of the German company, Opel AG for $26 million.  (The very same Opel they are trying to sell right now!!)  They have options on the other 20% and they which will be exercised in 1931.  They were in trouble in 1929!!  But GM will eventually recover and end up making a profit during the Depression, and will pick up significant market share.

Ford Motor Company introduces the first station wagon, which is a Model A with a wooden body, kind of a box.  It's the first "Woodie".  I owned one of these as a young man.  What I would give to still have it now!! And it was selling for about $500.

The aviator, Glenn Curtiss designs and builds the first mobile home trailer, and it goes on sale in New York with the Hudson Motor Car Company.

It's 1929, and America is doing well.  US "motorcar" production tops 5 million.  GM has produced over 1.3 million cars in 1929.  US motorcar ownership is about 23 million, up from 7 million in 1919.  This number, 5 million, will not be sustainable after this year.  And it will not be reached again for 20 more years.

The MG sportscar is being built in England.  It rapidly become a symbol of the British sportscar generations, and remains in production until 1980.

 
1930

Now "Things"  were just starting to get bad.

The Dow started the year off on a down slide, but still above 248 pts.  It wouldn't last long. 

Congress votes a $230 million Public Buildings Act March 31 and a $300 million appropriation for state road-building projects April 4 to create jobs.  These kinds of numbers have never been heard of before and we considered staggering!  Hoover Stimulus?? 

The "recession" as it is being called, is extending worldwide.  35,000 textile workers go on strike in Japan.  Unheard of prior to this.  France enacts a workmen's insurance law April 30.

US unemployment exceeds 4 million.  No real records were being kept back then.  President Hoover says that 4.5 million Americans are out of work.  He appoints a Committee for Unemployment Relief and requests about $150 million for new public works construction projects from Congress on Dec 2.  Congress acts quickly and passes the Public Works Bill, 18 days later, and funds it with $116 million.  We were not using GDP at the time, but using the National Income, and it fell from $81 billion to $68 billion.  There are only 3.4 million union workers in the US, and they are concentrated in construction, railroads and trucking.  Autos and steel are not unionized yet.

In June, President Hoover makes  what history will call his biggest errors.  He signs the Smoot-Hawley Tariff Bill into law.  This put tariffs to the highest levels in history.  Until then, the average import duty was about 25%.  This Bill raised that to 50% and shut down imports.  Other countries follow suit in retaliation, and international trade basically comes to an end.  Congress approved the bill in a special session called by President Hoover.  Over 1,000 US economists signed a petition warning Congress not to sign this bill, but it went unheeded.  The Smoot-Hawley Tariff Act, and a major recession took the rest of the world into the abyss of the Great Depression as production dropped and unemployment increased worldwide.

This is very interesting.  Wall Street prices break downward again in May/June.  There had been an early spring rally, and had taken stock gains back to 33% average of last years losses.  But, more investors started to realize the economic realities of a "business depression", and stock prices began a long decline that will take them to a new low. 

Not everyone was waiting on the government to "fix everything that was broken".  The CFO of United States Steel, Myron Taylor, started a work policy that "shared the work load with the employees working".  This meant everyone working making steel for them got between 2 and 3 days work per week.  Not the best deal, but better than what was ahead for many in this country.  Even when production dropped to 17%, Taylor kept all the mills running, even extending credit to the workers.

The prelude to the GDP comes in 1930, from a Russian born economist.  He has become an American, and comes up with the formula for the Gross National Product Index. 
 
Late 1930, there are many strikes in Europe, and economies there start to collapse completely.

Over 1,300 banks close in 1930 in the US.  The largest is New York's Bank of the United States.  It had 62 branches, 440,000 depositors, and closed it's doors on Dec 11th.  The Secretary of the Treasury is Andrew Mellon.  There are a few quotes attributed to him during this time.  Some are amazing, but one is the best.  Mellon believed the depression was the result of a natural phenomenon!  "I see nothing in the present situation that is either menacing or warrants pessimism".  Mellon favored deflation and he opposed public-works project.  He will be asked to resign in a short period of time.

The DJIA closes 1930 at 164 pts, down from 248 at the end of 1929.  And the worst is yet to come!!

1931

President Hoover says in March that "prosperity is just around the corner," but financial panic and economic depression engulf most of the world. Vienna's Kreditanstalt comes under pressure in the spring, but the government refuses to abandon the gold standard as a drop in the value of the schilling  will increase the burden of Austria's foreign-currency-dominated debt and raise the possibilities of hyperinflation. They ask for help from  neighboring countries and from the new Bank for International Settlements.  But there really is no help.  So the government supports the Kreditanstalt with a large infusion of freshly printed currency; a flight of capital quickly depletes Austria's gold and foreign exchange reserves. The Kreditanstalt goes bankrupt May 11, and the panic spreads to Germany, where the Darmstadter und National Bank closes. Between 30 and 40 percent of the German workforce is jobless. The Danatbank goes into bankruptcy July 13, which forces a general closing of German banks that continues until August 5.  So the gold standard starts to die off.

The Bank of England advances money to Austria, but Britain's own financial position critical.

In the Kentucky, coal miners and guards have a gunfight May 4 at Evarts following 4 years of strikes and labor disputes. The Harlan County Coal Operators Association began spending a lot of capital in 1927 to terrorize miners and their families with strong-arm tactics in a move to keep the United Mine Workers from organizing. This conflict came to a head,  and the result was a gun battle that left three guards and one miner are left dead.

The first mention of the Communist Party shows up in 1931.  San Jose, Calif., canneries were forced to cut wages, and workers organized by Communist Party members walk out in the summer.  I remember a book about Woody Guthrie, and how he wrote songs during this period of time for the Communist Party and union organizing.  It wasn't that people embraced communism.  Most didn't even know what it was.  It was that "things" were so bad, they would embrace anything new that might help.

Britain receives a French-American loan August 1, but London and Glasgow have riots September 10 to protest government economy measures, naval units mutiny September 15 to protest pay cuts, the pound sterling is devalued September 20 from $4.86 to $3.49, and Britain is forced to abandon the gold standard September 21.

Detroit lays off another 100,000 workers as motorcar sales collapse, reducing employment in auto plants to 250,000, down from 475,000 in 1929. Two out of three Detroit workers are unemployed.  The situation will improve somewhat, but unemployment will remain high in Detroit until 1942.

The "Swope Plan" for economic recovery, outlined by General Electric president Gerard Swope, says, in effect, leave the problem to business and let trade associations develop national economic plans to revive the economy. It never happened.

U.S. unemployment tops 8 million now. Although the government will stick with it's reports of 4.5 million people.  Now we are in a serious situation.  No one has any money.  So now just eating becomes a major issue. In NYC, people compete with dogs and cats for what they can find in garbage cans. Hunger marchers petition the White House December 7 for a guarantee of employment at a minimum wage but are turned away. President Hoover who  was U.S. food administrator from 1917 to 1918, opposes suggestions that the federal government distribute food to the needy.  Rather he insists that charitable organizations will provide what is needed. The American Red Cross dietitians offer advice on how to eat economically, but the organization refuses to use its funds to help the unemployed.  They must have been waiting for some kind of disaster?

U.S. bank failures total 2,294, up from 1,352 last year.

In December 1931, President Hoover calls for increased taxation in his annual message to Congress. More revenue is needed to make up for a $900 million deficit. He recommends an emergency Reconstruction Finance Corp. (RFC) and a public works administration; Federal Reserve Board governor Eugene Meyer has been a leading advocate of the RFC, and he chosen to head that organization..

Japan abandons the gold standard December 11th.  Prime minister Tsuyoshi Inukai tries to reflate his economy.  By printing money!!

DJIA closes on Dec 10th at 57 pts.  It rebounds on Dec 11th to 80 pts, but closes the year at 78, and is down a record 52% from it's close of 164 in 1930.  But this is not the bottom, not yet.