Saturday, July 19, 2008

The Man Who Lived Through 1929 (Reprinted)

Here is a post from last year that you may enjoy. This one gives you a feeling for what may lay ahead. It offers some perspective as to what we may expect, this time around. prev. printed 8/31/07

Let's go back and picture a man from the 1929 era. He would have been born about 1890 and been about 40 at the time. His world had gone from horse and buggy to the automobile. Between 1908 and 1927 Ford had produced 15,000,000 model T's. In 1904 there were three million telephones, by 1915 you could call coast to coast (the cost was prohibitive). By 1906, the electric light bulb was commercially feasible to produce. Radio came into its own in the 1920's. By 1924 there were 3 million radios in use in the US. The airplane had come on line. It was used to speed up mail delivery; commercial aviation was still a few years away. Technology had turned his life into something new and different.

The banks were loaning money out, 100% financing, interest only, 5 year loans that had to be refinanced at the end of the term. Also, you could borrow any amount you desired from your stock broker just pay the interest. Buying stocks on margin (10% down) was the name of the game.

Another thing to come of age, was installment buying. GMAC was created in 1919 to help sell more cars, and it did just that. There had been a stigma attached to not paying cash and through advertising, it became more acceptable. By the eve of the great depression, it had become a way to acquire the American Dream. You didn't have to wait and save up for what you wanted, you could have it now.

From 1915 to 1930 we had been transitioning from an agrarian economy to a more industrialized economy. Technology had changed our way of life without any perceived realization of it by the general population. A farmer was 10 times more productive with modern machinery. Agricultural prices were dropping because of this over supply. The speculation that had been going on in farm land was unsustainable. A bigger farm did not increase your return on investment, just the opposite.

Things started to go bad in 1926 with the Florida Hurricane, land speculation lost its appeal (severe understatement). Then in June of 1928 there was a mini stock market crash, a precursor to the big one. In October of 1929 the big crash came and "rearranged" the financial markets. In 1930 Congress passed The Smoot-Hawley Tariff Act, which some claim was responsible for the unemployment rate climbing to 25% (over the next two years). Bank failures started to be a problem in 1929 only to get worse in 1930, 1,352 banks failed. In 1931, 2,294 banks bit the dust.

So what happened to our gentleman? If he had a 5 year I/O loan that was due for renewal, it wasn't renewed; the bank wanted and needed the cash. Result, the bank got the house. He stood a 1 in 4 chance of being unemployed. If his bank had failed, he might have no savings left. Anything bought on installment might have to be returned or a payment made on it.

He probably survived with memories of the rough times he had. People from that generation were seasoned with these memories. They acted differently as so to avoid making the same mistakes over again.

Today, in the world of 2008, the "group memory" of these people is no longer with us. Are we destined to make the same mistakes as they did so long ago?

The evolution of the Internet is comparable to Radio of that time. And Google stock isn't quite as high as RCA's stock got to, before the crash. Then, there was the installment buying and interest only loans of the 1920's, verses the credit card of today and the same old loan formula (use their money not mine).

Almost sounds like an eerie episode of The Twilight Zone, doesn't it?

4 comments:

SACKERSON said...

You need the group memory among the people who are currently driving the bus. Here in the UK, the people running the political show grew up on Easy Street.

Also, the traders in the financial world seem to be kids who aren't old enough to remember recession, let alone Depression. George Goodman aka "Adam Smith" wrote about this experience-impoverished perspective.

NMMM.NU said...

Outstanding!!!

Only think you may be forget, is in 1930, the taxes went to 70-80%. Well if you elect Obama, you will receive similar tax percentage very soon.

Jim in San Marcos said...

Hi Nmmm.nu

They did raise taxes in the 1930's but it had a peculiar result. The amount they got in revenue was less than before the tax increase.

Whoever wins the next election, probably gets to turn off the lights. The US is broke (that's suppose to be a secret)!

Thank you for your comments

Paco Bell said...

I am not in debt, does that put in the minority? Feels like that.

I've never felt comfortable with debt. Even when I bough my house (in 2000) I bought it below market price, put 20% down, and kept the DTI under 30%.

Sure, I could have swung for the moon, but I had what I considered real concerns of being able to afford to keep it and still have money left over at the end of the month- so I could enjoy my life. Also not feel panic or strain should I be out of a job temporarily, or face some unexpected event.

Refinancing? Cashing in on perceived equity? Yeah, right.

I think the moral hazard of expecting a bailout for our miscalculations has been present for some time.

Calculated Risk pointed me toward this NYT video of someone who might be my exact opposite.

--

My paternal grandfather was born in the 1890's (WWI vet) and so this profile gives me a little clearer picture of what his life must have been like.

Thanks for reposting this, Jim.

--
Paco Bell

"The higher I go, the crookeder it gets."
-Michael Corleone