The Roaring 1920s were great, and it would be our good fortune to reprise them in this decade of the 2020s. All this about the “excesses” of the 1920s causing the Great Depression of the 1930s—how silly it is. In short order, beginning in 1930, we had the Smoot-Hawley Tariff, an income-tax increase led by a top-rate hike of 150%, a 50% increase in government spending, enormous real increases in state and particularly local tax rates, government seizure of the American people’s gold holdings, and regulation like never seen before. The idea that investors did not peer into the future circa 1929 and ascertain the outlines of these things is preposterous. Government, not the market system, caused the Great Depression in whole.
Still there was one big anomaly in the decade preceding, the 1920s, and it remains instructive today. The American people bought stocks in unprecedented fashion. Stocks on the installment plan, stocks via investment clubs, stocks bought with capital rather than income, stocks on margin. It was a big new fad. Nothing like the participation in the market that the nation experienced in the 1920s can be found in previous eras of history.
And the reason for this new push into stocks, into the big increase in the stock indexes, about 250% through the summer 1929 peak? It remains elusive.
By today’s lights a 250% increase over a decade is nothing special. We saw a similar rise in the 1980s and 1990s and a good way towards it in the 2010s. In the 1920s, moreover, the idea of investing in the instruments of the American economy was not a new idea. For fully the previous century, the United States had been the prime magnet of global capital. It was the paragon of global growth during the central years of the industrial revolution. The American economy became the largest in the world, and then some, beginning in the 1880s, having been quite literally a backwater not many decades before.
Before the 1920s, in other words, people, as they acquired resources by dint of legendary economic growth, were fully free to buy stocks, bonds, financial instruments and bets of all sorts on American economic fortunes. The New York Stock Exchange was founded in 1792, and there were innumerable regional exchanges. If people wanted to buy stocks, the opportunity was there.
And yet stock-market participation remained small, until the 1920s. What gave?
The big switch, in the 1920s, from the perspective of the average person’s financial position, is what occurred with respect to the long-term value of savings. Never before in American history had there been multi-decade evidence that the dollar was not holding its value. In the 1920s, this evidence emerged for the first time. It forced a revolution in how people approached putting away dollars for the future.
The consumer price index was first developed in 1919, to track to the big inflation of the previous several years, apparently an artifact of wartime, under which the prices of ordinary things available in 1913 had more than doubled. In the 1920s, prices settled a little, to about 170% of the pre-Great War 1913 level.
As prices stayed at this higher par, it marked the first time that more than a decade had elapsed in which the dollar had not held its value. During the War of 1812 and the Civil War, there were dramatic episodes of inflation, but in both cases prices reverted to their long-term par in short order.
In the 1920s, however, the inflated price level remained sticky, holding at that 170% level. It introduced a possibility never before demonstrated in American history: the dollar can lose a substantial part of its value and never get it back.
This was the precondition of the mass participation in stocks in the 1920s. Prior to the 1920s, saving money in traditional and homely instruments, including in cash and coin, enabled one, years later, to buy all the things one had been able to when the money had first been saved. Furthermore, this saved money captured the real economic growth of the interim, since the quantity of saved money tracked earnings, which increased with economic growth. These realities gave no spur to stock-market participation.
The permanent denuding of the dollar, the reality of which first became clear in the 1920s, forced savers to find some instrument that would pay them back in the old way, in money that held its value. The choice was made to capture, via stocks, the forthcoming profits of businesses. Here would be money commensurate to what was needed to buy things in the future.
The stock market “mania,” to use Charles Kindleberger’s phrase, was a choice born of new circumstances. If the dollar was no longer “sound”—the standard adjective attaching to the dollar’s quality prior to the 1920s—savings strategies had to adjust so that savers could stay whole when they called on their money in the future.
Stocks crashed horribly, to be sure, 1929-33, but there was no savings strategy to avert it, outside of stuffing cash in the mattress, and good luck with policing that in desperate days. Banked money bit the dust, gold-owning was outlawed, and bonds got killed too.
It was the government’s lack of interest in the gold-dollar matter of the 1920s, a symptom of which was the sustained increase in prices, that caused the stock-market mania to begin with. Government then, in the early 1930s, stepped in with its tariffs, taxes, confiscations (of both gold at the federal level and property at the state and local level—the foreclosure crisis), and spending increases, and thereby chased away the real economy. The void left over was the Great Depression.
Pointing to the stock-market mania as the cause of the Great Depression was, all along, nothing more than yet another illustration of the government’s defect of character. Government caused the Great Depression but could not muster the integrity to admit as much and blamed something else. Lol.
What is useful for us to ascertain today is why people invest in stocks in contemporary society. As I noted last week, they do so because conventional means of saving money are not available. And as in the Roaring 1920s, the more resources we devote to figuring out the mundane matter of saving, the more we deprive our economy of investment capital and useful growth.