Read The Great Depression Online
Authors: Benjamin Roth,James Ledbetter,Daniel B. Roth
The Great Depression (31 page)
There has been no summer letdown in business so far. Steel mils here are operating at 80%. Best since 1929. Sheet & Tube reports a profit of $3.40 per share of common for 1st 6 months of year. This is also the best since 1929. Retail trade continues good and everything points to progress. The stock market is a puzzle. It still goes steadily up without a serious break since March 1935—17 months. Sooner or later there will be a bad break but nobody knows when.
The
Cleveland Plain Dealer
in past few days ran a series of articles picturing Youngstown on the verge of a boom. It quoted steel operations at 80% without the usual summer let-down, bank clearings, retail sales, etc. The article was greatly exaggerated and even tho business is better than since 1929, law business is still only fair. However the next year or two look good.
Cleveland Plain Dealer
in past few days ran a series of articles picturing Youngstown on the verge of a boom. It quoted steel operations at 80% without the usual summer let-down, bank clearings, retail sales, etc. The article was greatly exaggerated and even tho business is better than since 1929, law business is still only fair. However the next year or two look good.
It is remarkable how quickly things come back. Within the past 12 months Sheet & Tube as a money earner climbed almost from the bottom to the top of the list. Its stock which sold in 1932 for $4 a share is now selling over 70.
The stock market continues up and without a pause since March 1935. Sooner or later there will be a bad break—but when?
Nothing new except that the steel industry continues to boom and is operating in Youngstown at 80% when normally there would be a slump this time of year. In the past year it certainly came back with a vengeance. Sheet & Tube has been a spectacular performer and is now at 80 compared with 6 in 1932 and 15 about 18 months ago. Seems to be too high in spite of progress.
War again threatens in Europe.
Law business is again slow. It comes in spurts. The lawyers certainly deserve a break after the past six years.
Retail trade in Youngstown is good. Things look pretty much normal. People are traveling again and Mr. Burger tells me it is hard to get reservations.
The presidential campaign is beginning to warm up. It promises to be a close campaign but I think Roosevelt will win although personally I would like to see him defeated.
The stock market holds up well and has not had a serious set-back since March 1935. In other recovery periods it seems that after two years of rapid upturn there has always been a serious set-back because of too rapid progress. If this holds good in this depression then in spring of 1937 there may be such a set-back. This situation is also altered by possibility of inflation. The public seems to have forgotten about it but there has been no change in the basic factors. Prices are gradually rising but it is difficult to say whether this is caused by the drought or by the money situation. I am inclined to believe that the latter is a factor and that we will still see some inflation arising out of this money manipulation. In many cases for a long term investment stocks are probably still a good buy but they seem to me to have gone beyond the state warranted by present improvement.
This depression has indelibly impressed on my mind one thing—and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss. My experience as a lawyer shows that a large proportion of business failures are caused by lack of capital rather than by lack of technical business knowledge. Even in domestic life there can be no happiness without sufficient surplus to cover emergencies such as illness or death. And yet knowing these things it takes infinite patience for a young man today without financial backing to lay a sound foundation. Business today requires huge amounts of capital—the small business has been crowded to the wall—and it is next to impossible for a young man working as a clerk to lay aside 10 or 20 thousand dollars in order to go into business. Either he must forget marriage or he must wait until middle years—and by that time he has lost the spirit of adventure. Even tho opportunities in business today are greater than ever, it presents an almost insurmountable wall for the young man without funds.
The European situation is again tense and it would take very little to start a war. Spain is torn by a class-war and Germany and Italy are aiding and abetting from the side-lines. It seems to be democracy vs. dictatorship with democracy losing out fast in Europe.
It is an interesting sidelight on this depression that many companies which went to receivership during the depression are now being reorganized. In most cases the common stock was wiped out but bonds or preferred are good. In 1933-4 these preferred stocks could be bought for as low as 25¢ per share ($100 par) and are now worth as high as $14 (Continental shares). Here again a man with liquid capital and courage could have made a fortune on a comparatively small investment. Some who bought at low prices did not have the courage to hold on and sold at a nice profit of $4 or $5 per share. The real winnings went to those who held onto the receivership shares through the whole reorganization. A. H. R. held 1000 shares of a tobacco (Phillip Morris) stock which sold for 50¢ a share—he sold at $16 per share and celebrated—the stock is now over $100 per share. If he had only held for a year longer instead of getting out at the beginning of the rise.
During the past 30 days there has been a very definite lull in business. My law office has been very quiet. Except for the fact that the roads are crowded with new automobiles, it would be exactly as it was 3 years ago at the bottom of the depression. Can it be possible that the rapid recovery during the past year was not normal but was caused by the distribution of the two billion dollar soldier bonds and other government expenditures? It gives me a headache to think of the possibilities.
During the past year while things boomed there has been very little talk of inflation but if anything the situation is worse than ever. It is a curious fact that all thru this depression there have been so many abnormal things to consider—such as government spending—that it has been impossible to appraise the future. It is this very uncertainty which has halted recovery so often and caused the business man to hesitate about expanding. Will the next 5 years bring an inflation boom with unexpected spurts upward and crashes down or will it bring normal recovery? I hope it will be the latter but I am inclined to believe it will be the former. I am getting very tired of the clamor and excitement and the uncertainty. I long for a return to normalcy and steady but slow growth.
It is amazing to note how quickly empty store-rooms have been occupied during past 6 months. I do not believe there is one desirable location available now on West Federal St. Most of them have been taken up by chain stores at high rentals. Even the old Dome Theater is being converted into a store-room. The movement is now spreading into residential areas and new groceries, etc. are opening up on every corner.
6/10/68There are many vacant store-rooms on Federal St. and land is cheap. Business has moved to the suburbs.
With the passing of Labor Day optimism is rampant and prospects for fall business are bright. Predictions are freely made that prosperity will continue without pause for at least three or four years. In the meanwhile stocks are selling at 30 and 40 times their earnings. It is just as bad as in 1929 except that the future earnings prospects are bright. Investors feel that a stock is worth more than its present earnings indicate. Nevertheless it seems to me the stock market has already discounted future earnings for a long time ahead and that optimism will carry the market too far.
General business conditions are good and almost every industrial index has reached normal. Indications are that the next year or two will move up above normal and then we will have a relapse. To date the coming National Election has been quiet and has not affected business.
In spite of this return to normal the law profession shows little or no improvement and lawyers everywhere are complaining bitterly. Streets are crowded with shoppers, new automobiles everywhere—and law offices vacant. We have between 300 and 350 lawyers in Youngstown with a population of about 185,000. This means less than 600 population per lawyer. Conditions in other cities are about the same. The situation has been aggravated by concentration of corporation legal work in large law firms. The past six years has been a nightmare for the individual practicing lawyer. The profession is clearly entitled to a break and yet in spite of this young lawyers are turned out in an increasing stream. Most of them say they do not intend to practice their profession but in the end they do because good jobs are not available and without capital they cannot go into business.
I was retained today by client W to defend him in a suit by a brokerage company to recover a deficit of $5200 left after they sold him out following the 1929 crash. There is little I can do for him but a study of the record of his transactions is interesting. He started with a capital of $12000 of his own money—bought on 25% margin—and usually sold when the stocks advanced 3 or 4 points. Usually he made a profit between 1927 and 1929 but on a few occasions suffered a loss. When the crash came in 1929 he was probably a few thousand dollars ahead of the game but the broker was holding at the time $35000 of second rate stocks on a 25% margin: The broker sold him out slowly thru 1930 and 1931 always hoping the market would get better but it got steadily worse and in the end W lost his original investment of $12000 and still owes the broker $5,200. Looking back it is easy now to see that W did not have a chance to win out. He bought and sold for every few points profit. Every time he sold he bought at a higher price and his profits went back into stocks. In the end he was bound to be caught by the crash with a bag full of stocks on narrow margin. It is hard to draw any general conclusion here and this case is similar to thousands of others. Assuming that we knew the crash was coming this is what he should have done:
1. If he had bought the stocks outright instead of a 25% margin—he would at least have owned them when the crash came in 1929. If he had held them until 1936-7 he would get out almost all of his original investment.
2. The fellow who went into the market in 1927 and traded for short profits as above did not make any money and took all the risk. The fellow who really made money already owned his stocks when the boom started—held them for several years until prices were exorbitant—and then sold them because he could get more than intrinsic value.
3. Such a fellow would then hold his cash until stocks were selling at far less than intrinsic value (1932) and then buy his fill holding for 5 or 10 years until the next boom.
4. How would he know the bottom was reached in 1932? He would not know. Most people did not realize the depression was over until a year or more after the turn had been made. If the fellow had waited until 1933-34 when prices were shooting up he could still have bought at bargain prices. In 1932 with stock prices at 10% of normal he could not have gone far wrong in buying stocks with 20 or 30 years earnings record and with a good chance to survive the depression.
However, not one man in a million succeeded in doing this and that is why the millionaires club is still exclusive.
This case as so many others shows clearly that to build an estate it is necessary first of all to get money by saving it and secondly it is most important to invest these savings so that they will increase and work for you without losing the principal. Most people learn the first rule and succeed in saving various amounts out of their earnings but very few learn the second rule—how to invest it so it earns a profit and yet not lose the principal. It follows then that it is most important to learn how to invest money and make it work for you. W—above mentioned—actually saved $12000 out of his earnings. Wisely invested, he might now be financially independent. Instead he is broke. What is that one thing that leads one man to financial independence and the other to the scrap heap—when both worked hard and both saved the same amount out of their earnings? W has a record which shows he was avaricious and was not satisfied with a fair investment return. His record also shows his investment judgment was bad whether he bought real estate or stocks. He bought vacant lots in poor neighborhoods that never developed and his equity has disappeared. Other people bought real estate and stocks at the same time and prospered. Most of those who prospered were not avaricious. It is all in the nature of the beast. It is probably just as great a sin to be too conservative as too avaricious. A man who puts his small savings in gov’t bonds at 2 1/2% may have 10 to 15000 in his old age but he never will be wealthy. Somewhere in between the ultra-conservative man who is afraid to take even a legitimate risk and the avaricious gambler who bets on anything—stands the ideal investor who has learned to make his money work for him. He accumulates money first by savings—then he carefully investigates and weighs a dozen investments before he finally selects one to put his money in. He is willing to take a legitimate risk but is not willing to gamble. If he invests in real estate or mortgages he first examines the property, the neighborhood, the future development and will probably have it appraised by experts. He investigates thoroughly before he buys. Such a man with ordinary business judgment will usually make a profit on his investment. Not much perhaps on each individual investment but in the end he will accumulate and as the pile grows he will find many bargains offered him because he has capital to invest. If he invests in stocks or bonds he will not follow blind tips or rush into a seething market with thousands of suckers—but in the quiet of his office he will carefully examine the earnings records of the company, its future prospects. He will seek advice if necessary and then buy only if he thinks the price is fair and the prospects good. He will hold on for several years and share in the growth of the company and will sell only if the company loses ground or if a stock-crazy public offers him much more for his stock than its intrinsic value.
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