The Great Depression, Part Ten/A

With such an economic collapse, the nation’s banking system began to become unglued, or more precisely, become more unglued than it had been. I covered some items about the banking system in an earlier part, but it bears repeating. In those times, there were literally tens of thousands of banks across America; and by banks, I mean independent banks, not large banks with lots of branch banks. During the 1920s, with farming in a mini-depression, if you will, many banks in rural areas of the country collapsed or at least teetered on the brink of collapse. By the early 1930s, as the Depression gripped the entire nation, the banking system was in serious trouble, and not just in rural areas.

Treasury Secretary Andrew Mellon was a “hands off the economy” kind of man and favored letting the economy take a deflationary course; that is, simply put, letting prices fall until they hit such a point that people would start spending again. The problem with that idea is, lots of folks get hurt, business people and workers alike, bankruptcies increase and given what we know from hindsight on how bad the economy was, the country might not have survived as we know it. Mellon, on the other hand, even saw some benefits to the Depression, in that people would live more frugal lives and work harder, and less competent folks would fall by the wayside, as new people stepped forward to pick up the pieces, but as some folks put it, no one wanted the Depression to continue so as to reap these “benefits.”

So what does “deflation” mean? Deflation is a period of generally falling prices. Now, you might say, “Hey I like lower prices,” but the thing is, as prices fall, the existing structure of the economy begins creaking and cracking, depending upon how long the slide in prices continues and how severe it is; that is, what the underlying conditions in the economy are. I suppose economists would say there’s a certain amount of deflation in the economy most of the time, at some level, or in individual cases. For example, I know the owner of a lower-end used car lot, or I should say the owner then, as the lot has now changed hands twice since the time of this story, only one and a half years ago. He told me that he got many, but not all, of his vehicles to sell by going to new car dealers, or used car dealers who deal mainly in more recent model cars; you go to buy a car, you trade in your old vehicle, they give you so much credit toward your purchase with them. These dealers then keep the title, but let him have the car to sell, like on consignment. When he sells the car, he pays them whatever price they’ve asked, they sign over the vehicle to him, and he signs it over to his customer. As I’ve noted in other articles, the Cleveland area economy has been struggling for quite some time. He told me how bad business was, and that he didn’t always have enough cash to pay off the other car dealers for their “consigned” vehicles right away; so he would take the money from his next sale to pay off the vehicle he had previously sold. Business got so bad, however, that at times, he needed to pay off several vehicles. In Ohio, and I assume most states are similar, when you get a used vehicle, you get a thirty day tag from the dealer until you get whatever you need (like emissions tests, for instance), including the title from the car lot, so that you can then go to get your license plates, or transfer an existing plate over to your recently purchased vehicle. The problem for some of his customers was, he couldn’t pay off the place where he got their vehicle, so they wouldn’t sign over the title to him, and consequently, he couldn’t give his customer their title. It was so bad, I heard him tell his employees “We’ve got to sell a car today, even at cost or a loss.” Eventually he put his couple of workers on part time, so now they weren’t making as much. Now this is an example of individual business deflation! When you take this example and expand it to a national level, businesses cut prices to lower high inventories or to get some cash to work with, lower prices mean less, if any profit, so workers are either laid-off or have hours cut, thus diminishing their purchasing power, their bills go unpaid or only partially paid, and they cut back on other purchases. When enough of this happens, these other businesses then feel the pinch, and they start doing the same thing, so the plunge goes on, until finally things hit bottom at some point, purchasing power and prices having some kind of equilibrium, and then the reverse process begins.

WORD HISTORY:
Twig-This word for a small branch goes back to Indo European "dwo(h)," which meant "two." This then produced Indo European "dwigha," with the idea of "forked, two-pronged." This gave its Old Germanic offspring "twigan," meaning "a forked branch." This gave Old English (Anglo-Saxon) "twigge" (seemingly with a long "i" sound), which later produced the modern version. German has "Zweig," Low German Saxon has "Twieg," Dutch has "twijg," West Frisian has twiich. All of these are West Germanic languages and I believe all, except Low German, pronounce it with a long "i" sound. Apparently the North Germanic languages do not use forms of the word, as I could not find any.