The Great Depression, Part Four

If you ask most people today when the Depression started, most would probably say that it was when the stock market crashed. The stock market crash did not actually cause the Great Depression, although it can certainly be argued that it was a contributor to the economic collapse. Interestingly, since the time of the Depression, more Americans have become involved in the stock market, albeit many through pensions or 401 Ks. The major crash of 1987 didn’t bring the economy to a standstill, nor did the market problems in the 1990s. The thing to understand about the crash of 1929 is that the stock market was so psychologically tied to the economy in the public mind, that when the bubble burst, the economy did indeed suffer. The “crash” was a clear indicator to people that the “good times” were over. Consumer spending, already tightening before the stock fiasco, tightened even more. Businesses, already seeing inventories grow, began to consider cutbacks, especially in any expansion plans, thus curtailing investment. Lending institutions, shaken by the stock market plunge, tightened up on loans for just about everything. Leading up to the crash, stock prices were not based entirely on sound economic fundamentals, but rather on speculation. The market hit a peak in September 1929 and then bounced around for several weeks before the crash took place and the panic actually took hold. Undoubtedly the more savvy investors of those times came to realize that stock prices weren’t supported by actual underlying business activity, and that the time had come to sell. Economists usually tell us that the stock market predicts the economic outlook about 6 to 12 months down the road, but in 1929, the stock market reacted to a downturn already in progress. The price that was paid for ignoring such fundamentals was very high indeed, as stock prices collapsed and lost about 50% of their value. On the other side of the stock market/depression argument is the fact that stocks did recover to some extent at various times during the period of the Depression, including somewhat after the fallout from the "Crash" settled down. Other events, however, then triggered further stock slumps.

If I come to you and say, “Hey, I’ve got a company that sells such and such a service or product. I want to take it to a higher level. Do you want to invest?” What do you want to know, right off the bat? What exactly is the company selling, how well has the product or service sold, what is the potential market for it, how much does it cost to manufacture (if it is a product of some kind), what does your existing company balance sheet look like, etc. You want to know fundamentals! Why? Because if you invest, you want to make money, and knowing how the existing company is doing and functions gives you some idea of your chances of making money by investing in this company. Much of this sound business logic was forgotten in the late 1920s.

Just as there was a concentration of wealth at the very top of the economic ladder, there was also a concentration of corporate ownership of American business. By 1929, through various mergers and buyouts, only a couple of hundred large corporations controlled about half of all American industrial production. During the 1920s, the Coolidge administration gave a “wink and a nod” to such mergers, and it rarely used the antitrust laws to prevent business mergers of any kind; and, many small independent businesses disappeared.

A positive for the Coolidge administration was that the frugal Coolidge kept the Federal budget balanced, and in fact, in surplus for a time. He actually paid DOWN the cumulative Federal debt. Now, you might say, "How can anyone turn this into something bad?" Well, while it certainly wasn't Coolidge's fault, with the government in no need of borrowing, money that frequently went into government bonds went into.....the stock market!

To be quite honest, I could pretty much go on and on with the many "causes" of the Great Depression, but I think you get the point, so while there are still some "causes" that came into play later, I'll move on to what was done in the aftermath of "The Crash," and the already sliding economy in Part Five.

WORD HISTORY:
Great-This word goes back to Indo European "ghreu/ghrew," which meant "to grind, to rub." This gave its Old Germanic offspring "grautaz," which meant "coarse" (the product of grinding). West Germanic kept the general term, which gave Old English (Anglo-Saxon) "great" (back then with emphasis on the "e"), which then became "greet" before the modern version. The idea of "coarseness" produced the eventual change in meaning to "large, big," and then "grand." The more common Old English word for "large" was "mickle," but "great" overtook it, leaving it as an obscure word in modern English. The same thing happened to an extent with "great," as both "large" and "big" generally replaced it in the context of size, but it has retained common usage in terms of respect, as in "She is a great woman," and in terms of relatives, like "great grandfather," "great grandmother," or "great uncle." It also can be used to add emphasis, as in "My garden produced several great big tomatoes." Common in the other West Germanic languages (English is West Germanic): German has "groß" (the script-like "ß" stands for "ss;" thus, "gross"),^ Low German has "groot," West Frisian has "grut," Dutch has "groot." All mean essentially "large, big, and grand," as with their English cousin.

^ Modern German is generally based upon high dialects, and hundreds of years ago in those dialects, a sound change ("shift") took place, which often changed "t" to "s" or "ss."