"The Great Depression" Part Three

What do you need to sell something? A buyer. You can have an item you want to sell, that, in theory, is valuable, but if you don’t have a buyer, it has no value. Why is this pertinent to the story? Because when stocks were dumped onto the panic-stricken stock market for sale, frequently there were NO buyers for them. Naturally, this depended on a number of factors, most notably the reputation of the company, the stock of which was being sold. So, for example, Mr. Jones had bought stock on margin (credit) from the XYZ Brokerage for “Acme Products Corporation,” a fictitious company just for the purpose of example. When prices turned down significantly, the brokerage contacted Mr. Jones to get him to put up more money to gain equity in the stock. Mr. Jones decided not to put any more money into the declining market, and the brokerage put in an order to sell the stock to try to recover all or part of the money they had “loaned” to Mr. Jones. With the market swamped with “sell” orders for “Acme Products,” it took a few hours for any buyer to be found for the stock. Mr. Jones had bought the stock at $25.00 a share, but when a buyer came forward for these same shares, the buyer only offered to pay $5.00 a share. As you can see, the financial loss could be substantial. Remember, in this example, each share lost $20.00 from the original purchase price; so, if there were 100 shares, the loss was $2000, a large amount in those times, as most Americans did not earn $2000 in an entire year.

In more recent times stock transaction info is reported pretty much instantly, although there are glitches on occasion. Previously, stock transactions were reported by ticker machines, which had special typewriters connected to the telegraph system and printed out transaction info on paper, called “ticker tape” (thus, the “ticker tape” parades in New York City). When the system functioned well, it was “almost” like “real time” transactions. When the “Crash” took place (and actually, there were several bad days, not just one), the ticker could not keep up with everything. This whole situation also caused panic and more selling, as people were afraid to hold onto stocks about which they had no info, or the info they did have was an hour or two old. Again, an example: You have put your life savings, or a good part of your life savings into shares of “Acme Products Corp.” News reports tell about the declining stock market. You contact your broker, but he says that the last info he has is 90 minutes old, and that shares of “Acme” were down $3.00 from the price you originally paid for them. Should you wait to see if everything settles down? If you wait, will you lose most or all of your savings? If you sell, you might take a loss, but getting part of your money back beats getting nothing, or very little back. This is the kind of scenario that confronted people and they had to make decisions based upon “old” information. Many decided to sell, and this contributed to the panic and dumped even more “sell” orders onto the market, thus forcing prices down even more. Remember, a buyer has to be found for all shares being offered for sale. There's no magic to this.

Now if you were a broker, or some other company that loaned money for stock purchases, you kept the stock certificate as collateral on the loan. Your balance sheet would have been fine, as long as the stocks you were holding as collateral didn’t turn down significantly (I prefer to use the word “significantly,” as stocks typically have minor down days, but with “margin” requirements of only 10% down, buyers didn’t always hold a great deal of equity). Once the market took the deep dive, however, you were in for some serious losses. The same can be said for companies that financed furniture and appliance purchases. When the economy began to drift lower, and workers lost their jobs, fewer people could make the payments. As the situation worsened, the companies could take back your washing machine, but there wasn’t much they could do with it, except sell it as used, if they could even do that, and this only made the unsold inventories of new products sit in warehouses and on store shelves even longer, which meant workers would not get called back to work to produce new items, which meant they didn’t earn income, which meant…. You can see the downward spiral here.

There are so many contradictory statistics about various economic data from the 1920s that I hesitate to use them, but using a range of numbers can at least show some of the things that were going on in American economic society. Farmers and their families accounted for somewhere between 22 to 25% of the American population. In 1920, these folks received about 15-18% of the national income. By the time of the stock market tumble, farmers got less than 10%, and keep in mind, that was BEFORE the Depression started! (See Part Two about farm problems during the 1920s.) Unemployment during the 1920s is difficult to calculate, as the government did not keep statistics at that time. There are estimates, but they are only estimates, and they vary widely, depending upon source, with some sources giving the unemployment rate in 1929 as low as 3.2%, and others giving it in the 5 to 5 1/2% range, and others still giving it at about 10%. Further, how many people were part time workers is very open to question, but that certainly matters. The problem for workers was that with “automation,” factories could produce goods faster and with fewer workers. So, while the new appliances and such that we’ve talked about were rolling off the assembly lines in huge numbers, workers had a less than steady source of work in many cases. Productivity increased tremendously during the 1920s, but the number of “man hours” actually decreased. Unions lost members during the decade, primarily because, with work so unsteady, there was a large pool of unemployed workers always available. With lots of potential employees available, there was less need by business to bid up wages much, and getting work was more important for many workers than joining a union. This certainly contributed to the income disparity of the 1920s.

WORD HISTORY:
Keel-The ultimate origin of "keel" is unknown, but Old Germanic had "keluz," which seems to have meant "timbers for the bottom of a boat/ship." This gave Old English (Anglo-Saxon) "ceol," with the same meanings, which then became "kele," before the modern version. By the way, "keelhaul" (German has "kielholen") was a form of punishment where a person was literally "hauled under the bottom of a ship/boat." "On an even keel" comes from the idea of "making the foundation level," and "keel over" comes from the idea of a ship rolling over to expose it underside." The other Germanic languages have: standard German and Low German have "Kiel," Dutch has "kiel," Frisian has "kyl," Danish has "køl/ kjøl," Swedish has "köl," Norwegian has "kjøl," and Icelandic has "kjölur." All mean "keel, the bottom of a boat/ship."