The Great Depression (42 page)
Read The Great Depression Online
Authors: Benjamin Roth,James Ledbetter,Daniel B. Roth
2. By selling government bonds direct to workers.
Our office girl gets a new job at a wage we cannot afford to pay. We will have to pay more now although business is not good. For the first time in many years jobs will be waiting for college graduates and they will be in demand.
The gov’t puts a limit on steel prices just after steel industry grants a wage increase of 10¢ per hour. More and more talk of inflation and more restrictions by government to prevent.
The war in the Balkans goes badly with the Allies and it looks as tho Hitler will have full control of the European continent. Also looks as tho U.S. will soon start to convoy ships and become involved in the war. Retail business is good and law work continues stagnant. It is nerve-wracking to sit in a quiet office while elsewhere business is booming. I don’t quite know what to do about it. With increased wages there should soon be more activity in real estate and with it more legal work.
The stock market is also stagnant and drifts down to the lows of 1939.
The S.E.C. starts to break up the utility holding companies and their common stocks go to record lows. The theory is that in liquidation the common stocks will be worthless.
President Roosevelt has certainly made this a “profitless” war boom for big industry. The steel industry for instance is forbidden to raise prices and yet costs including wages, taxes and materials are constantly going up. Caught between a fixed price ceiling and rising costs—the profit margin becomes less and less. Sheet & Tube Co. as an example is now operating at a theoretical 107% capacity—and the stock sells at $30 per share. Small wonder that a steady deflation of stock prices goes on and stock exchange seats sell at record lows. So far only the laboring class has profited by increased wages and steady employment.
There is very little to report. During the past month industry has been booming but stocks are low and the market stagnant. Brokers are being forced out of business. Priorities, price ceilings and taxes that take all the profit are making this a profitless boom. Financially I am almost as badly off as at the depth of the depression. The U.S. is constantly on the verge of a declaration of war and the situation in Europe does not look encouraging.
It looks very much as though the U.S. is in the world war. In a very aggressive speech last night Roosevelt warned the dictator countries that U.S. ships would deliver armaments to Great Britain—that our boats would freely sail the seven seas and if fired upon or attacked would fight back.
It is interesting to note that the President has declared a national emergency and brought the U.S. to the brink of war without first dealing with Congress. This is typical of constitutional evasions during the past 8 years.
Law business continues slack in the face of an industrial boom since Sept. 1939. One lawyer express the thought that the law profession would be busy next fall. His theory is that the public is paying old debts and filling depression-created needs with their present earnings. It is tough to see everybody on the march except your own profession.
I talked with Paul C—today. He says “During the past few years I have been spending most of my time in brokers’ offices trying to make a little money buying and selling stocks. I am disgusted and I will sell everything I have and stop fooling with it. For four years now the market has been stagnant and the chances to make money will not come again.”
I cannot quite agree with him. It is true the market has been stagnant for several years and this is why so many brokers have gone broke. High taxes etc. prevent corporations from keeping their profits and there has been no bull market in spite of a boom in industry. On the other hand many stocks are now selling below intrinsic value and pay returns from 6% to 10%. It seems to me now is a good time to buy these stocks and they will not only show a good investment return but in the next year or two may show a substantial capital gain. As examples Sheet & Tube, Inland and National Steel are all good companies; are selling at 32—69—44—pretty close to intrinsic values—they all pay dividends in excess of 6% and have a good chance for appreciation in an inflation scare or any other happening that might drive stocks up.
Business hums along at top speed. As an example, G.E. received orders amounting to $521 million in first 6 months of 1941 as against $212 million in first 6 months of 1940. An increase of 145%. Same is true of all industries. Profits however have not increased because of higher taxes, wages, etc. As a result stock prices have been stagnant although during the past week they have started to move up.
Germany now fights Russia—the U.S. plants troops in Iceland and we slowly draw closer to a “shooting war.”
Retail trade is good, consumers load up with household equipment, new autos, etc. for fear of a shortage. There is occasionally talk about inflation because of the growing national debt (now $49 billion) and because of the failure of the government so far to fix prices.
As usual the law profession drags along in the vanguard and has reflected very little of the war boom.
Business continues at top speed but profits of most large corporations for first half of 1941 are lower on account of higher wages, material costs, etc.
The threat of war with Japan cuts off further silk supply and closes hosiery mills. Women rush to the stores and put in an advance supply. For fear of inflation and a shortage the consuming public has been buying automobiles, furniture, real estate, radio, etc.
The government fears inflation and Congress is about to pass a bill increasing taxes and freezing prices. We are fast developing a war economy and its effect is not uniform. Many small concerns are closing their doors for lack of materials. Big industries, retail trade, automobiles, etc. are very busy. Law business has not yet benefitted except by a few real estate deals. Stocks are stagnant because of low profits shown on earning reports:
Since the war started in Sept. 1939 there has been increasing talk of inflation, priorities, freezing of prices, higher taxes, embargos etc.
All this has led to three different buying sprees on the part of the public: First came the buying of heavy goods such as automobiles and real estate; next the buying of furniture, refrigerators, radios and household equipment. The recent embargo on silk started a rush for soft goods such as silk stockings, linens and wearing apparel. Most of the American public has already prepared itself for the duration. Stores are frantically stocking up big inventories. An unexpected end of the war would bring chaos.
It is a curious fact that none of these inflation scares have caused buying of common stocks. Due to high taxes 1941 earnings are lower in many cases than 1940 and in the opinion of most people the picture is dark. Here again the public goes to the reverse extreme and I look for a rush for stocks one of these days. It seems to me many stocks today are a good buy. Likewise all these inflation scares and rising prices have not helped the law profession. In an inflation we would fare badly.
A good many wonder why stock prices remain low while industry booms. The answer seems to be that the market is acting just as if we were actually in the war. If this is correct and if the market follows the pattern of the last war then we may expect:
1. A stagnant and lower drifting market until we get into a “shooting war.”
2. A still lower market after we enter a shooting war.
3. During the war the market will rise with good war news and reverse. Business will not affect stock prices.
4. If war seems to be heading toward final victory prices will start up.
5. If victorious armistice declared—prices will go up for about a year.
6. Then comes primary war depression.
7. Then 10 years of inflation and boom.
8. Then the big collapse—2nd war depression and this will be worse than the 1929 collapse. May even end in alteration of whole capitalistic system.
There is very little to add. Business booms as we get closer to a shooting war—and the stock market continues depressed and stagnant. Strikes continue—wages of workmen go higher—prices rise—shortages and priorities everywhere—government debt rises rapidly—and there are many signs of approaching inflation. My law practice is only fair—and does not reflect the business boom. Taxes are increasing and there is talk of compulsory savings laws affecting 10% or 15% of income to prevent inflation. My guess is that none of these laws can prevent the working out of the economic laws or save us from punishment for the reckless spending of the past 10 years.
Stockbrokers are having a most difficult time making a living. Their offices are deserted. Many have closed. Some of the men who formerly earned large commissions are now earning as low as $50 or $100 per month.
Tax selling started early this year and has driven stocks down to low levels of 1938. Most of the sales are in low-priced utility stocks.
Yesterday—Sunday Dec. 7th—Japan without warning attacks Hawaii, Philippine Island, Guam and other points. Several hundred people killed. I just returned from lunch and heard Pres. Roosevelt ask a joint session of Congress for a declaration of war against Japan. So the U.S. enters a shooting war.
The 2nd day of war finds the U.S. in the midst of war hysteria. Blackouts take place in New York and Los Angeles. Many false reports of invasion by Japanese planes. 1500 lives lost at Hawaii & Philippines. The stock market has another bad day today: 2 1/2 million shares.
Germany and Italy declare war against the U.S. about an hour ago. It is expected that both houses of Congress will meet this afternoon. Stocks dropped again yesterday. AT&T dropped from 138 to 133. A stock exchange seat sells for $19,000—lowest since 1898. Roosevelt asks for 7 day week—speeding up of industry and cessation of strikes.
The market continues stagnant about 5 points below pre-war prices and the lowest since 1938.
One financial writer thought this was a good time to buy stocks—many of which are paying over 10% dividends and selling at 4 or 5 times earnings. He said we must conclude U.S. will win the war and on this theory stocks are a good buy for the long pull because:
1. Most industries—like GM—are changing over from peace to war production—and later will reverse the process. Even tho the gov’t will not permit large profits they will be permitted to keep reasonable earnings and pay a fair investment return.
2. Public utilities will suffer from rising costs against fixed rates.
3. Little business will be squeezed—some out of existence—but big business will go on.
4. Even the taxes will be raised—it is all being spent on war production and goes back into business.
5. Stocks are selling today on a 20% earning basis. Even if taxes go higher they are a good buy for long pull.
6. After war there will be a great need for peace-time production.
7. If inflation comes—it is better to own good common stocks than cash.
This is the craziest business year I have ever been through. We are at war, steel mills have been humming, wages are high and everybody working—yet my law practice was worse in 1941 than in 1940. Because of war, high taxes, threat of inflation, government restrictions, etc. etc. business men are afraid to expand, buy real estate or do anything constructive and there is very little for the lawyer except an occasional divorce case or other domestic business. The same with the stock market. It has dragged all year—brokers are even worse off than lawyers—stock exchange seats sell at record lows, etc. Some businesses do a record business and others go broke. It is all a matter of luck. Auto dealers sold a record number of cars in 1940 and now there are no tires to sell. Tires have been rationed—so dealers in new tires are out of business while second-hand dealers and re-treaders are busy. There may be a few people who are making money but I do not know who they are. This is truly a “profitless” prosperity and it takes a strong heart to remain in business.
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