Viewing the Depression

Joe Nocera has an interesting article in the NY Times about a lawyer who kept a diary during the Great Depression. Here is the key bit:

Mr. Roth’s diaries have just been published in book form — “The Great Depression: A Diary” — edited by his son Daniel, who worked in his father’s law practice for many years, and James Ledbetter, the editor of The Big Money, a financial site run by Slate. It is an eye-opening read, though not necessarily in the ways you might think.

Because it was written in the 1930s, Mr. Roth’s diary is not the kind of tell-all we’ve come to expect in this less restrained age. Although he mentions repeatedly the struggles of lawyers and other “professional men” during the depression — Mr. Roth always uses the lower-case “d” — he never shares how his family struggled through it, or how he was able to send his daughter to college in 1937. (Daniel Roth told me that his father, who died in 1978, later divulged that he had had a good life insurance policy, which he borrowed against to keep food on the table.)

Instead, every few days — or every few weeks during some stretches — Mr. Roth jotted down his thoughts and fears as the Depression deepened. “Banks are absolutely terrible in their insistence on payments of notes and mortgages,” he wrote in 1931. “It is the old story of lending you an umbrella when the sun is shining and then demanding it back when it rains.”

He recounts painful conversations with friends and acquaintances who had accumulated some wealth by speculating in the stock market, and then lost everything when stocks plummeted and they couldn’t meet margin calls. He is obsessed with the stock market; he is constantly noting the prices of the blue chips of his day, and his writing shows him to have the instincts of a good value investor, a term that hadn’t yet been invented. But, as he also constantly points out, he never has any money to invest, much to his chagrin.

Mr. Roth is horrified when the local banks fail (“I still cannot believe that the Dollar Bank — the Gibraltar of Youngstown — has closed its doors”) and points out that even after the banks reopen, customers aren’t allowed to withdraw more than a small fraction of their savings. He explains how entrepreneurs with money buy up people’s frozen passbook accounts for 50 cents on the dollar and how barter and scrip come to replace the money people no longer have.

Events that we know about from the history books he was reacting to in real time. He was furious to learn, thanks to a series of highly publicized Congressional hearings, that some of the nation’s most prominent bankers did terrible things during the Roaring Twenties. (“By manipulation the officers boosted and unloaded on the public their own stock in National City Bank as high as $650 per share when its book value was only $60.”) But he makes no mention of the Securities and Exchange Commission, whose birth was the direct result of those incendiary hearings.

Mr. Roth is skeptical of President Franklin D. Roosevelt’s New Deal programs, and worries that the president’s fondness for deficit spending will ultimately be disastrous. He keeps thinking inflation is right around the corner. He worries about the rise of Hitler. He writes about gangs of farmers who threaten sheriffs, judges and anyone else who tries to foreclose on a farm. He watches the rise of unions, another trend he finds troubling.

Mr. Roth, of course, is writing without the benefit of hindsight.

Notice how the worries of those at the upper end of society never change: worries over 'incipient' inflation, concerns about deficit spending, dislike of the President, dislike of unions, etc. And notice that the same corruption at the top -- banks playing fast and loose with the rules while bankers stuff their pockets -- applied back then as today.

I'm still waiting for the other half of the 1930s to happen: stiff regulation of the financial industry and a closer scrutiny of the stock market. There are too many sharks in the pool. Government's role is to work hard at removing the sharks so ordinary people can put their toes in the pool.

If you want to focus on something in Roth's diaries, this is the part that is probably most applicable to today:

At various points in the early 1930s, the stock market spikes — and he starts to think it’s a good time to buy stocks. Indeed, he writes, many experts are advising people to get into the market, and some of his wealthier friends do so. But six months later, the experts invariably turn out to be wrong, and his friends wind up losing their money. During the Depression, optimism was ruinous.

And yet — and this is something we tend to forget — between 1935 and 1937, business began to boom again, and a sense of growing prosperity took hold in the country. In Youngstown, the steel and rubber factories were operating at near capacity, just as they had in the 1920s. On Christmas Eve in 1936, Mr. Roth wrote: “Just came back thru the stores on my lunch hour. People are spending like drunken sailors.”

A week later, he added, “It seems to me that the time has come where we can formally and officially announce that the depression of 1929 has ended.”

This, of course, turned out to be completely wrong. That September, the market crashed, and the Depression took hold once again. Today, most economists believe that the downturn was caused by Roosevelt, who turned off the spigot too soon, trying to balance the budget instead of continuing to pump money into the economy. Not understanding the reason for the downturn, Mr. Roth was deeply discouraged by the reappearance of the Depression. “It is terrible to contemplate that we are in the 9th year of depression and still cannot see clearly ahead,” he wrote in March 1939.

Those calling for "balanced budgets" and for the Federal Reserve to "raise rates" to cut off incipient inflation need to study these pages very, very hard.