Lesson of the 1929 Depression

Well, we are into the Roaring Twenty’s, the days of contraband alcohol, speakeasies, and organized crime. Charles (Lucky) Luciano controlled the vices in New York as did Alphonse (Al) Capone in Chicago. I grew up in the 50’s and 60’s and things were pretty crazy back then. I just can’t imagine what that time in history was like.

By the mid 1920’s the massacres and bloody strikes were beginning to ebb, and the country was about to enter its most severe depression. The Depression that lasted about ten years was due mostly to an unequal distribution of wealth and extensive speculation in the stock market. Under President Coolidge and Hoover, tax policies shifted in favor of the top 1%. Sound familiar? Shifting tax policy is a favored action by Republican Presidents. Even now, they still cannot get the idea out of their mind that rich people’s wealth just doesn’t trickle down. Rather it trickles into making them richer and buys power to further insulate their positions and fortify them against their threatening interest and yes labor as well. By 1930, the top 1% had a combined income equal to the bottom 42%. According to Business Insider in an October 13, 2021, article: “The latest data from the Federal Reserve shows that the top 1% has more wealth than the middle 60% of the income distribution.” I am sure that it is even higher today.

In 1929 Henry Ford earned $14 million while the average worker earned $750 that same year. The problem was, the wealthiest 1% owned too much of the economic pie, leaving not enough money to sustain the rest of the population or the economy. From 1923-1929 the average worker output increased 32% in manufacturing, however, their wages only reflected an 8% increase over that same period of time. Over the past few years, we have seen a similar result, where worker productivity was up, yet employers would not share their excess windfall with workers.

The balance of wealth compared to the money available to buy goods to keep the economy running became skewed. For example: Henry Ford could not buy 5 million cars per year or 50 million loaves of bread per day in order to keep people working. You needed an entire working population to keep, “the invisible hand” that Adam Smith advocated. The theory is once his ideology is put in place the economy hums along just as an invisible hand is guiding it. However, if there is not enough commerce and workers to supply it and keep the demand for consumer goods up, it falters.

Huge profits were made through speculation as stock prices continued to rise because of it. It worked through buying on margin. Here’s how it worked: I could buy a share of stock from my broker for $75.00 by putting only $10.00 down and borrow $65.00 from the broker. If the stock sold at $420.00 a year later, I would turn that $10.00 into $420.00, minus the $65.00 I owed the broker along with a 5% commission I would net $340.00. Not bad, a 3400% return. Thus, began the frenzy of buying on margin, little money was used to employ the investment. The investment companies were too busy to even think about regulating their business, they just wanted to make money.

The Glass-Steagall Act (1933) Separated banking to prevent this kind of Depression from happening again. The law created demarcation lines between consumer, commercial and investment banking. It prohibited commercial banks from selling stocks and securities to ensure they would not recklessly speculate with the depositor’s money. Nor could the bank pay interest at market rates. Well, guess what happened back then? By 1929 brokers had lent out over $8.5 billion and their loan rates went as high as 20%. Everything was great until it was not when prices began to drop in September and October of 1929. Then on Monday October 21-27 it began to shake. A selling frenzy started and then on Monday, October 28 it came falling down. Then on “Black Tuesday October 29, it collapsed. Stockbrokers went to their clients and called in their margins. Yes, the full amount of what they purchased and their commission. That is how it crashed. Again, big money left this country in turmoil. It certainly was not the average worker that caused it, yet they were the victims of the bankers’ folly.

There were not enough products to consume because of the massive unemployment, therefore, there was truly little production of any kind and an economic system that left only very few extremely rich. Well, Adam Smith’s invisible hand really was invisible at this time. The economy ceased. The wealthy had most of the money. The poor could only buy basics. Industry could not produce because there were not enough buyers to create demand and sustain the industry.

This is where we fail to heed the lessons of history. As I keep reminding you, there were five depressions (Panics) during the 1800’s. So often, that now, they are now calculated into our business models. We don’t seem to learn. Yeah, we have heard it all before. Blue Ribbon Commissions, bi-partisan committees to study the subject, “so this will never happen again.” And they do work for a while but the lure of so much profit to be made compels the lobbyist to water down or repeal the regulations, so it just keeps happening. Just as Glass-Steagall was designed to control banking it was repealed in the 1990’s which caused the 2008 crisis and then replaced with a weaker version of “Frank-Dodd” and then repealed again.

Let me explain: During the run up to our last depression in 2008, with the deregulation of the Glass Steagall-Act, consumers took advantage of the low interest rates on mortgages and credit cards to purchase all kinds of products. Which created a “housing bubble” during the 1990’s. That, coupled with changes in banking laws of the 1980’s, allowed borrowers with a tarnished credit history the ability to procure a mortgage at a low or sometimes floating rate that required a balloon payment (payment in full) at the end of the loan period. By 2007 these subprime mortgages made up nearly 15 percent of the housing mortgages.

Then banks and mortgage companies bundled up and packaged these mortgages and sold them to bond companies, hedge funds, and other investment vehicles, where they would be invested in long-term securities such as pension funds. When the flood of foreclosures began, purchasers of these bundled securities realized they were in trouble. It also affected many pension funds who purchased these securities with good faith believing the promised returns would be paid out to retirees upon fruition of the mortgage period. In the end many U.S. cities, towns and public and private pension funds never recovered.

Not only were the mortgage holders in financial trouble but also the big brokerage houses like Goldman-Sachs that the government chose to bail out and left Lehman Brothers to go into bankruptcy. When it all caved in, this crisis left even the United States itself extremely close to insolvency.

This lesson of history is. Unrestricted capital paid for the watered-down version of Glass-Steagall to Frank-Dodd to today where they are both repealed. You see there is just too much money involved to keep the shark frenzy at bay. Former Federal Reserve Chairman (and deregulation advocate) Alan Greenspan, when asked about it. I remember him saying that he was shocked that the industry did not regulate itself. Really! Gee, what a surprise.

In 1932 Hoover finally came around in signing the Norris-La Guardia Act. It was an Act that specifically separated labor from the Sherman Anti-Trust Act and prohibited the use of injunctions in ordinary labor disputes and outlawed “yellow dog” contracts. In it the government recognized its bias toward capital and confirmed it in the preamble of the act. “That it had aided the right of capital to consolidate itself and because of this left the unions, members and those dependent on it helpless to exercise their rights to negotiate the terms conditions of their employment free from the coercion of the employer.” They knew it, all that blood and turmoil, and they allowed it to happen. Damn them!

I hope now you can better understand, “those who do not heed the lessons of history are destined to repeat them”. And, why I keep saying, there is nothing wrong with capitalism that a strong dose of regulation can’t cure. The fact is, 3% of our population can say they are employers who pretty much dictate and buy regulations and statues that affect what happens to the other 97% of us, we call workers. Is it not about time we change that equation?