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While searching the Net for info. on shorting

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bartermania   Friday, 12/30/05 05:21:56 AM
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While searching the Net for info. on shorting in the US during the 1920's, I found this account of the period. It seems to me that we still have similar problems now. The complete posting is here: http://www.emayzine.com/lectures/1920s193.htm

(Part of the article is below)

The center piece of the New Era government was the tax policy sponsored by the secretary of Treasury Andrew Mellon. Mellon was one of the three or four richest men in the world who was a banker with close ties to the steel industry.

Mellon believed that economic prosperity depended on the extent to which capitalists reinvested their profits in economic growth Mellon favored the rich by slashing taxes that fell most heavily on them.

He reduced the personal income tax for people who made more than $60,000 a year and by 1929 the Treasury was actually refunding money to the largest corporations in the US. US Steel received a refund of $15 million in 1929.

To compensate for this loss in revenues Mellon cut government expenditures. To Pay for government Mellon raised the tariff on imported products. Second Mellon sponsored a regressive tax bill so that taxes fell harder on the middle and lower classes of the US. Also there were many new excise taxes such as on autos and cigarettes.

Mellon contended that when businessmen reinvested their government-sponsored windfalls they created jobs which led to a better standard of living for all Americans. This was the famous trickle down theory.

From 1923 to 1929 Mellon appeared to be correct in his assessment and people called Mellon the greatest Secretary of the Treasury since Alexander Hamilton.

Just how much damage his policies did to the national economy would not be realized until after 1929.

But as early as 1924 the policy of subordinating federal policy to the short-term interests of big business and banking was helping to make a shambles out of the international economy.

The key problem of the international economy was due to the cost of the war. The war had pushed every major European power to brink of bankruptcy. Britain and France were deeply in debt to the US some $10 billion and since France had been the battlefield for most of the war France demanded that Germany pay france and Britain each $13 million. As the Germans paid Britain and France these countries would pay back the US.

Thus, the flow of international payments was from Germany to France and Britain and then to the US. The problem lay in the fact that Germany was being drained of wealth for an industrial nation to exist. German gold was used to pay the debt and inflation went crazy in Germany. Many economists warned that if the European continued to bleed Germany of its wealth this would serve to promote political extremism and threaten the economies of all the European nations.

There were several ways out of this morass. First the US could import more European products but Mellon’s policies shut the door on that idea. Alternatively the US could forgive France and Britain their war debts and they in turn would cancel their Germany’s reparations. But thanks to Mellon and others in the administration the government was too closely allied with banking interests to do that.

At the same time American bankers were profiting doubly from the European financial mess by loaning money to the Germans to subsidize their reparations payments.
And as far as the Republicans were concerned the profiteering was good enough for the Republican administrations of the 1920’s.

The circular flow of payments continued as American bankers loaned money to Germany; Germany paid 2.5 billion in reparations to France and Britain and they, in turn, paid $2.6 billion to the US.

The European economy was becoming sapped of its vitality and the American economy was becoming indirectly damaged by this arrangement for the capital that was to trickle down to ma and pa in middle America or be reinvested in the American economy was going abroad to Germany.

After the Washington Treaty the Harding and Coolidge administrations returned to a policy of isolationism. Still, in 1928 Senator Kellog and the French Foreign Minister created the Kellog-Briand Pact which outlawed war and 62 nations signed this pact.

In terms of Latin America the Harding and Coolidge administrations were anything but isolationist especially when it came to Nicaragua and other Caribbean Basin countries.

Part of the reason for this was the US investments in Latin America climb from $800 million in 1914 to 5.4 billion in 1929.

Industrial and agricultural productivity soared in the 1920’s but the size of the workforce remained the same.’

And while dividends on stocks rose 65% in the years between 1920 and 1929 wages increased only 25%.

Before the 1920’s people only borrowed money to start a business or buy a house for in theory borrowing money should only be invested in something that would be productive, make more money and then you could retire the debt. But this was to change in the 1920’s

For the first time in history American began to borrow money simply to live more pleasantly and they went into debt, not to produce but to consume.

The chief agency of consumer borrowing during the 1920’s was the installment plan with E-Z payments. In the 1920’s 60% of all autos were bought on credit, 70% of the furniture, 80% of heavy electrical appliances and radios and 90% of sewing machines, pianos and washing machines.

This was also the great period of consumer advertisements of buy, buy, buy and advertising became a profession.

Chain stores became common, image advertising was used, anxiety advertising was used and the automobile became the cultural symbol the New Era.

A Major weakness of the Coolidge economic approach was that significant numbers of Americans were left out of the buying spree and people in the rural areas may actually have been getting poorer during this orgy of consumer credit spending.

Since economically deprived groups are rarely politically articulate or listened too in our political system mainstream America was quite at ease. Businessman’s clubs flourished, and Henry Ford was seen as the great American wise man, afterall anyone who made $25,000 net per day must be wise most American figured.

Business was worshipped, as was conspicuous consumption, crass materialism had become the new religion of America.

There was a real estate boom in Florida and thousands of get rich quick schemes and as we have seen land in Florida became more expensive not because of tourism and it being a vacation paradise, but because each speculator sold the land to another speculator. perhaps as much as 40% of all the real estate in certain areas of Florida changed hands over a dozen times in a month. In the relatively small city of Miami there were over 2,000 real estate offices.

Every acre in Florida was skyrocketing many northern investors were willing to buy the property sight unseen and this led to much fraud.

The crash came when a hurricane that hit Miami and the price of land plunged.

In the 1920’s even the Middle Class was (s)peculating on the stock market since stock brokers offered middle class investors the option of purchasing stock on the installment plan and the brokers made it out to look that with the appreciation of the stock there would almost no payments to pay. Money for nothing, you cant go wrong.

Thus, investors with just a few hundred dollars of investment cash could buy shares of RCA Victor by paying out as little as 10% of the quoted price of that companies shares.

And in this way there were able to hold 10 times as many shares and they could buy in reality.. A banker or a broker would loan the speculator the balance of the stocks actual price with the stock themselves serving as collateral.

When the shares were sold, presumably at a high profit the loan was paid off and the shrewd speculator pocketed the difference which was also close to ten times what they would have made had they paid for them in cash. In 1926 1.5 million Americans were playing the market.

In 1927 during a bull market it did work this way for hundreds of thousands of people.

In the summer of 1929 values went crazy; ATT climbed from $209 to 303, GM went from 268 to 391 and then to $452. Overnight people were becoming millionaires.

But like land in Florida the price of stocks did not reflect their true value which was the productive and earning capacity of the corporation. By 1927 prices were rising because of the speculative mania, entire companies put their capital assets into this bull market in order to make a quick killing. At one point Coolidge told people publicly that he thought that stock prices were cheap and this stimulated another great wave of stock buying and even more inflationary stock prices.

Joseph P. Kennedy said in later years that he had sold all of his stocks in the summer of 1929 after the man who shined his shoes told him that he had invested in the stock exchange. Kennedy correctly reasoned that if such a poorly paid person was buying stock there was no one out there left to bid prices higher and he was right.

On September 3, 1929 the average price of shares on the market peaked and then dipped sharply. Then on Black Friday of October 24 a record 13 million shares changed hands and values collapsed. GE dropped 47 points that day as did most major corporations.

On Tuesday, October 29 the wreckage was worse as panicked speculators dumped 16 million shares on the market and when the dust settled the following morning more than $30 billion had been lost.

The eradication of so many dollars shattered Americas trust in the business world and culture of the 1920’s.

The Great Crash of 1929 did not cause the Great Depression of the 1930’s but it exacerbated its impact on average Americans. The Great Depression was a result of the fundamental weakness and contradictions of the world economy.

Middle class families lost their savings, Banks went broke and closed up in the middle of the night and as they closed throughout the country the average and poor American lost their life savings.

With the economic contraction corporations cut back on production, throwing people out of work or cutting wages in half or worse.

People who had mortgages contracted in the high days of 1928 and 1929 were ruined, people lost their homes and farmers their farms.

And foreclosures contributed to further bank failures. As people cut back on consumption, farmers and corporations were forced to produce less and less and even more people were thrown out of work and so it went, down, down, down.

By the end of 1930 the depression had engulfed the nation and the bad times did not really lift until 1940 after the economy had been jolted back into full productivity by the outbreak of war in Europe.

The Great Depression was the most serious economic collapse in American history but it was also the most jarring psychological and moral experience that the American people had ever to face except for the Civil War. At least 50% of all Americans were out of work 90% were underemployed and in some areas close to 85% were completely out of work. There were homeless everywhere. It was estimated that there may have been 200,000 to 300,000 homeless people within one year by 1930. In one bank alone in NY over 400,000 people lost their life savings.

Shantytowns were everywhere. It was so bad that the USSR said there 6,000 skilled jobs for Americans in the machine industries and over 100,000 people applied for these jobs to leave the US. There were over 1.5 million people who would do any job just to eat and this number excluded children who numbered just as many.


ps. The highlighting is mine and I fixed 2 spelling errors...although there are still more of these. The info. and it's message are what is important in mind.

- I will not be a slave to or of death cults - n/b/k - NO QUARTER FOR CORRUPTION http://investorshub.advfn.com/boards/board.asp?board_id=3319
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