With the stock and the financial markets in turmoil, some are asking if we are headed for another Great Depression.
Is this 1929 again? My short answer is, “No.”
The economy may seem dismal now, but we’re still in great shape compared to the early 1930s.
Most people are aware of the collapse of the stock market in 1929 and believe it caused the Depression. The market did collapse, starting October 1929, but it was not the cause of the Depression. The collapse simply made that situation worse, but it would have been bad anyway.
Let’s look at some economic history.
In the 1920s, the U.S. economy expanded rapidly with the production and purchasing of durable goods. During those times, most families bought their first cars, refrigerators and radios. However, by 1929 the demand for these durable goods was declining. Most people were not buying a second radio, refrigerator or car.
The 1920s was also a time of huge road construction and paving. Prior to that decade, most roads between cities were dirt. That changed in the 1920s. For instance, the road between Albemarle and Salisbury, U.S. Highway 52 was paved in 1927. With all the purchases of durable goods and the expenditures of public projects, the economy boomed.
The stock market in the 1920s also boomed. Stocks could be bought with as little as 10 percent cash and 90 percent credit through brokers. Stocks went up and people thought this was a way they could get rich. As an example, with the expanding demand for radios, RCA shares rose from $1.50 in the early 1920s to $600 per share by 1929. People could not get enough.
With the economy slowing, the stock prices peaked in late 1929 and prices began to fall. Since so much of the market was supported with borrowed money, prices fell and the value of the stock dropped. It plummeted below the amount borrowed to purchase the stock, which forced people to sell their shares. As a result, the market collapsed. By late 1932, the decline in stock prices totaled 83 percent. This resulted in millions of people losing their savings. Worse for the economy, when the borrowers couldn’t pay back their loans to the banks, those financial institutions collapsed and millions more who had never bought stock also lost the money they entrusted to banks.
Prior to 1933 there were no guarantees for bank deposits. When a bank failed, the depositors lost their money. Today, we hear of a few bank failures, but the FDIC provides insurance, so deposits are safe. Bank failures today are insignificant compared to the early 1930s. Between 1929 and the end of 1932, 21 percent of U.S. banks failed. In North Carolina, 45 percent failed, including some local ones.
With failing banks and people rapidly losing money, they were forced to buy less. With fewer goods being purchased, businesses closed or reduced their workforce. Unemployment increased to 25 percent for the nation with another 20 percent working only part-time. Industries experienced very different levels of unemployment. According to the Federal Reserve, unemployment in the construction industry reached levels above 75 percent, while the shoe manufacturing industry experienced an unemployment rate of only 3.4 percent.
Farmers were also in trouble. From 1929 to 1933, the total farm output decreased 5 percent; however, according to the Bureau of the Census, farm prices dropped 47 percent. This left farmers with little income and many were unable to repay their farm mortgage. At the beginning of 1933, 52 percent of those mortgages were delinquent. Many farmers lost their land to foreclosure and Stanly County wasn’t immune. As a child growing up in the 1940s, I was well aware that several family friends lost their farms during that era.
With very high unemployment and large business and farm losses, governments were unable to collect enough taxes to meet their own needs. As a result, many local governments reduced their services and payrolls, which contributed to the sharp economic woes. It was because of this problem, North Carolina first levied a 3 percent sales tax and used it to start paying the salaries of the public school teachers. Before the depression, most teachers’ salaries in this state were paid from county taxes.
In recent days, the news has frequently referred to one condition or another as being the worst since The Great Depression. That may be true, but this year’s events have not come close to bringing us back to the Depression era. To extract a very relevant quote from Abraham Lincoln’s 1859 Address before the Wisconsin State Agricultural Society, “This too shall pass.” And I am certain that it will.