Read The Great Depression Online
Authors: Benjamin Roth,James Ledbetter,Daniel B. Roth
The Great Depression (5 page)
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.
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.
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.
2/12/36I 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.
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.
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.
5/16/32This advice was premature. Here a year later prices are 1/3 of what they were in 1931.EDITOR’S NOTEThe 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 cratering 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.
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.
Wheat sells today at 45¢ and corn at 42¢. This is the lowest since 1855. I went to the fruit market house this evening. It was almost deserted. The farmers cannot sell their produce because men are not working and it has become popular for each family to have its own vegetable garden.
At a public sale by the sheriff today on foreclosure by the bank, the Carosella home at 1915 Elm St. was offered for the third time but no buyer found. It could be bought for $4400—and is really worth conservatively $7500. In 1929 the owner thought it was worth $11,000.
8/14/52The same house today at 1915 Elm is still in good condition and is worth about $12,000.
Business is at an absolute standstill and the big stores are deserted even tho they are all running sales and almost giving the merchandise away. Since the Home Savings & Loan Co. and other loan companies stopped paying out, nobody has any money and everybody seems scared and blue. We seem to have touched bottom in Youngstown and it hardly seems possible that things could get worse.
3/8/33This was a poor guess. Conditions in 1932 were much worse.
My brother Morris has been out of work now for almost 2 years and can’t find a thing to do. He is an engineer and draftsman. Jerome Burger was laid off by by the Truscon Steel Co. two months ago and is not very optimistic. Joe is still at Truscon but is afraid for his job. He says the air is tense and men are being discharged every day.
The Chicago Tribune announces that 100 theaters in Chicago and vicinity will close up. This is because of the tremendous overbuilding of theaters during the last 5 years of the boom. Each producer built his own chain of theaters and bought the real estate at fancy prices. Now they are going broke. In Youngstown movie admissions have dropped from 60¢ to 35¢.
Professional men have been hard hit by the depression. This is particularly true of doctors and dentists. Their overhead is high and collections are impossible. One doctor smoothed a dollar bill out on his desk the other day and said that was all the money he had taken in for a week. Lawyers are almost as badly off and most are not taking in enough to pay. We have been helped a little by bankruptcy and foreclosure work which followed in the wake of the depression but most of it does not pay because the assets are worthless. Most professional men for the past two years have been living on money borrowed on insurance policies, etc. The only work that comes in now are impossible collections on a contingent fee basis. Everybody is digging up old claims and trying to realize on them. Tempers are short and people are distrustful and suspicious. There is nothing to do but work harder for less money and cut expenses to the bone.
8/26/36I am re-reading this when the depression is about over. Professional men have not yet had a break. In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy bargains in stocks and real estate. I see now how very important it is for the professional man to build up a surplus in normal times. A surplus capital of $2500 wisely invested during the depression might have meant financial security for the rest of his life. Without it he is at the mercy of the economic winds. His practice suffers and he has no chance of rising above the level of the ordinary practitioner who lives from day to day and from hand to mouth.
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