Let Go Back To The 1920s for a little Financial history lesson
By Melvin J. Howard
Much of the source material on the 1920s used for this entry actually came from the web-site of the Library of Congress. The site has a very extensive selection of original documents scanned into electronic files and posted to the Web. For the 1920s era there is a fascinating collection called "The Coolidge Era and the Consumer Economy". I am a big fan of the Library of Congress you could leave me there for a week I would be in heaven.
Link to the Library of Congress 20s collection http://memory.loc.gov/ammem/coolhtml/coolhome.html
Now let's head back to the 1920s Einstein was about to make a speech called Language, Science and Goals.
Einstein was becoming a very famous person in this period known as the Roaring 20s and he was traveling in the US to explain his amazing Theories of Relativity. These theories made him the premier Time Traveler of Western History. In particular, his Special Theory of Relativity provided the Western world with a radical new look at the concept of time, and it implied strange time travel and time-space paradoxes. He notes in this speech the role that science plays in the world, and that it is leaders who set the goals and priorities first and science that follows, rather than the other way around.
Now imagine we are back in the twenties World War I is over, the Republican Harding is President and the decade started glumly with what is known as the Agricultural Depression. Radio was the new mass communications medium of the 1920s. The Westinghouse Company launched the first radio station KDKA in 1920 in Pittsburgh, Pennsylvania. Radio brought with it great promises as the medium for free speech and democracy but these promises were never fulfilled in the twenties, as we shall see.
Campaign finance and corruption scandals rocked the Harding administration, the most famous being the Teapot Dome Scandal, whereby government officials had secretly leased public oil-fields to private interests in return for cash and other favors. Harding had an unfortunate incident with some foodstuffs in 1923, he dropped dead and Calvin Coolidge became president and served as such until 1928.
The Coolidge Administration favored deregulation, industry self-regulation and brought in tax cuts to stimulate spending. ATT, NBC, and CBS built huge radio networks across the country that grew rapidly in the last half of the decade. These networks were all supported by advertising revenue and this tended to "dumb down" the content so as not to offend the major revenue sources.
The public relations industry and major corporate propaganda campaigns were launched. Spearheading much of this activity was a man named Edward L Bernays who wrote extensively on "The Business of Propaganda" and helped Coolidge get elected in 1924. Advertising in newspapers and radio claimed unprecedented proportions of print-space and airtime.
Various movements to encourage ever more spending were launched - such as the Better Homes Movement, and various targeted Women's and Negro consumer campaigns were launched. Marketing specifically to children kicked off with the first annual Macy's parade in NY in 1924. Target marketing statistical analysis reached new levels of sophistication with the introduction of the punch-card system.
America had reached new and amazing heights in consumerism! Popular radio shows, the new talking movies and song/dance combos such as the Charleston engaged millions and helped the decade become known as the "Roaring 20s."
The Chain Store was born. Sears, Roebuck and Company opened 324 stores nationwide between 1925 and 1929. Woolworths, Krogers, JC Penney, and Walgreens all spread stores all over the country. Many loved the convenience but hated that the small local merchants were forced out of business.
The stock market climbed to new heights in the late 1920s, the ordinary American was encouraged to invest their savings in the stock market and more Americans owned stock than ever before. At the same time the proportion of Americans on incomes below the poverty line continued to increase so that this proportion reached almost 50% by 1929 by some accounts.
Campaign finance was out of control with large companies like Dupont and General Motors giving lavish contributions to both parties. In a magazine called "The Forum", in a July 1929 issue, a man called Norman Thomas wrote an article called "Plutocracy in the Saddle" about business domination of government and calling the two party system the Twiddle duplicans and the Twiddle democrats. He also went on to say about this system of two parties in the pockets of big business "This is immensely better than having one dictator who might get shot or one party which might provoke a rival organization based on principle. Two parties to stage a good show annually and a roaring circus every four years to divert the people - what could be better? A devout and reasonably shrewd "captain of industry" who does not daily thank God for this great gift of two parties, both his for the campaign contributions, is an ingrate. Indeed its more sophisticated leaders may sometimes reflect how much better it is to teach people how to read and then give them what they should read, let them vote but control the parties through which they vote, [rather] than, like the stupid Czar of Russia, to try to keep the masses illiterate and voteless."
In the latter half of the 1920s the Public Utilities were consolidating like crazy through a handful of holding companies, and in the process were raising consumer prices. As people found out later they were also taking on huge amounts of debt, overvaluing assets and hiding losses from investors.
Corporate profits were soaring throughout much of the twenties generally thought to be due to increased consumer spending, credit availability and increased efficiency.
But there was a large part of this story not being told lest it would offend the advertisers providing the revenue to the radio stations and newspapers. This was that of the conditions and wages of the non-union workers in the many factories - such as garments, candies, and so forth. In general union membership declined drastically during the 1920s.
There were sweatshop activists in those days too. You can find some of their reports online at the Library of Congress website. In one report by the Consumers League of New York entitled "Behind the Scenes in Candy Factories" you can read about the appalling conditions of women who worked in these factories and the wages of around $10-12 a week, which was considered well below a liveable wage. The authors actually went to work in these factories in order to learn about these conditions. There were also reports documenting abuses in the garment industry and a campaign to encourage labelling of garments with the conditions they were made in. This was all in stark contrast to the glamorous images of these products portrayed in never ending streams of advertising.
A network of consumer activism popped up around the country much of which was spearheaded by a Nader-type by the name of Stuart Chase. In 1927 he co-authored a large study called "Your Money's Worth" documenting the shoddiness of many mass-produced products, the false claims in advertising and the trend for producers to make sure products would be replaced at frequent intervals. Comparing the consumer to Alice in a nonsensical Wonderland he found advertising industry correspondence with corporate clients that boasted that only 25% of purchases are based on real need - the rest are the product of "salesmanship".
On the financial side, Andrew Mellon was Secretary of Treasury for the whole decade. He was also one of the original founders of ALCOA - the Aluminium Company of America.
A fellow named Benjamin Strong, a Morgan man, was the Director of the Federal Reserve Bank of New York at the time. His informal and totally private agreements with the head of the Bank of England, Sir Montague Norman, to help England stay on the gold standard led the Federal Reserve to make harmful interest rate cuts in 1927 that created excessive stock market speculation. This played a large part in the severity of the ultimate crash. These dealings between Strong and Norman are documented in the diaries of Federal Reserve Board member Charles Hamlin, which are also readily accessible on the Library of Congress web site.
The British economist John Meynard Keynes was very critical of this move of England back to the Gold Standard saying that "In truth, the gold standard is already a barbaric relic." This is because the gold standard forced prices and wages to be set by international traders and speculators, rather than the needs of workers and consumers. Today, these are still set by international speculators in our current environment of free capital flow and domination by a single reserve currency - the USD.
This move by the Federal Reserve in 1927 to lower interest rates to help England stay on the gold standard encouraged stock speculators to borrow money at these low rates from the banks and then plow these borrowed funds into the stock-market. The banks themselves were engaged in a lot of these speculative activities because many of them also operated investment banking and brokerage businesses. This speculation continued until 1929 when in August the Federal Reserve raised interest rates.
Stock prices reached their peak in September - the Dow Jones Index having doubled in just over a year. But then with the higher interest rates on borrowed speculative funds and nervousness that stocks were overvalued, stocks started falling in October. Banks started calling in the loans used to buy stock. On October 29, 1929 (Black Tuesday) the Dow-Jones Industrial Index crashed enough to wipe out this doubling of the Dow. The Dow and the markets as a whole started on a downwards spiral that bottomed out in 1932. Many people just couldn’t pay off their loans and banks started going bankrupt all over the place from this and from the collapse of their own stock investments. There was at this time NO Federal Insurance of bank deposits and people saw not only their stock markets investments disappear, but also their bank accounts vanish. For, even under the gold standard, bank money is nothing but the confidence that it can be used in trade. When that confidence disappears, so does money, and so does everything you worked for and transferred into those mysterious bank credits. If you need to refresh you memory about why money is simply an abstract notion and how it comes into existence - you can revisit my archives.
America was still on the gold standard. So compounding all these problems the massive loss of confidence in the banking system caused the worst thing of all for the financial system - a run on banks - with people wanting to redeem their bank deposits and Federal Reserve Notes for gold. But of course there isn't enough gold under fractional reserve banking and such a run on banks will always collapse it. Expectation of bank collapse is a self-fulfilling prophecy, as it is with the stock markets, and as it is with any currency.
When you have such lost confidence in the financial system, where there has just been complete dependence on it, the whole monetary system collapses - money disappears because all it was confidence. Everything - markets, trade, business, work - it all starts to grind to a halt.
Herbert Hoover was President at the time of the 1929 Crash. In the subsequent depression neither his administration nor the Federal Reserve did very much to bring the country out of the depression. This helped to get FDR elected and he took office in 1933.
As history goes whenever a famous leader says something really important about big business it doesn't get remembered very well. Instead the large corporations who run the networks seem to have an uncanny knack of extracting only the short phrases that don't hurt revenues and playing them over and over again so that nobody will remember the important things that were said about their advertisers.
And so it was with the FDR inauguration speech of 1933 where every man and his dog remembers:
"The only thing we have to fear is fear itself".
But how many people remember the other parts of the speech where FDR is talking about the bankers and the Wall Street speculators? Such harsh criticism has never been heard since from an American President!
And yet our distress comes from no failure of substance. We are stricken by no plague of locusts. Compared with the perils which our forefathers conquered because they believed and were not afraid, we have still much to be thankful for. Nature still offers her bounty and human efforts have multiplied it. Plenty is at our doorstep, but a generous use of it languishes in the very sight of the supply.
Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.
True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They only know the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.
Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and the moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days, my friends, will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men.
Recognition of the falsity of material wealth as the standard of success goes hand in hand with the abandonment of the false belief that public office and high political position are to be valued only by the standards of pride of place and personal profit; and there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, and on unselfish performance; without them it cannot live."
"And finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."
And so the process for implementing regulation to provide checks and balances and bounds on the markets began. For it is only after such a collapse that the Wizards actually realize that their success in their own game does ultimately depend on the people's willingness to play in it. The regulatory blitz included all the landmark laws described above plus many more. The regulations, of course, started first and foremost with the Rulers of the Exchange of Mankind's goods and the Money Changers in their Temple.
The 1933 Glass-Steagall Act built a wall between banks - which are essentially the guardians of the publics money and the brokers and investment banks - who are the primary gamblers in the exchanges. This would prevent privileged bankers from gambling with other people's money to make profits for themselves. Glass-Steagall also separated these institutions from insurance companies who took on a completely different set of risks.
To restore confidence in the banks and therefore rebuild the monetary system 1933 also saw the birth of federal deposit insurance under the FDIC or the Federal Depository Insurance Corporation. This insurance would guarantee that depositors would get all or most of their money back in the case of bank insolvency. It was realized that this insurance created a moral hazard for banks. Because deposits were backed by the Federal Government banks had more of an incentive to take more risks. They could get more deposits by promising a higher return to depositors. With this money they could invest in riskier higher return assets to get higher profits and the depositors wouldn't be too worried about this because they knew there was federal insurance on their deposits. This realization brought in a law that forbade paying interest on checking accounts so that banks couldnt do this. The separation of banks and other financial operations under Glass-Steagall also helped to prevent this undesirable risky behavior of banks. Sometimes history can help us in the future.
