Monday, September 15, 2008

Why this prosperity?

"Our great national prosperity in recent years is not yet thoroughly understood" declared the president of the New York stock exchange, Mr. EHH Simmons, in an address in Chicago last month. "No nation in all history has ever experienced quite the same sort of thing and few if any of us have as yet satisfactorily analyzed its basic causes." And he might have added that few if any of us have any idea as to where it is all leading.

Most of us have some superficial idea as to the causes underlying the prosperity of the past six or eight years, but our views are likely to be colored by the prejudices, the political tenets, the occupation or previous condition of servitude of the individual expressing the opinion. To the banker it might seem that the tremendous gold stock of the country and the great expansion in credit to have been the basic causes of our prosperity. To the head of a labor union it might seem that high wages and the gradual rise in the standard of living in this country with basic reasons. The manufacturer would undoubtedly explain our prosperity by pointing to the development of mass production, which has made possible the consumption of more goods at lower prices. And an habitué of Wall Street would unhesitatingly declare that the confidence inspired by the election of President Coolidge in 1924 was the spark that kindled the flame of prosperity in this country, and the foreign observer would end up unquestionably insisting that the war, which changed this nation from a debtor to a creditor nation, to which Europeans must pay tribute for years to come, was the real cause of our prosperity. Probably all are correct to a certain degree. To pick out one specific cause as being the most important would be difficult, if not impossible.

Invisible banking

For the better part of the past year a controversy has been raging between one section of Wall Street and the Federal Reserve Board over the question of money rates, and particularly the attitude of the Federal Reserve officials toward the money market. At the root of the entire controversy is the development of a new phase of modern banking, which Colonel Leonard P. Ayers, banker and statistician, describes as "invisible banking" . And back of that is the fact that the keenest financial minds in the country are vaguely groping their way, fearful, on one hand, that the great expansion in nonbanking funds, which are being offered for sale at interest rates ranging up to 10 or 15% or more, may blow the bubble of speculation in the stock market to the bursting point; yet wondering all the while whether this may not be part of the normal evolution of banking and comprise a new and permanent factor in the credit situation of the country. The nature of this new form of credit has been explained in these columns previously. It has been shown that while the security for this credit is stock exchange collateral, the indirect effect of money so alone is to provide credit for industry, since many corporations are issuing securities to obtain capital that formerly was obtained from banks.

Those who "view with alarm" insist that these nonbanking funds are subject to withdrawal upon short notice, particularly that portion advanced by foreign lenders and corporations which are subject to sudden emergencies. They argue that in such an emergency the entire stock market entourage will be clamoring for credit at the doors of the New York banks.

Those who view the situation with confidence argue that these loans "are not credit, manufactured by the banks", and as a result, "a money market technique devised for the control of credit does not apply with equal force to loans which represent capital savings." With logic they insist that there is nothing in the Federal Reserve act that permits the reserve officials to dictate how businesses or individuals shall invest their capital, and they imply that the Federal Reserve is not in tune with present-day business.

This, then, is but one of the many new faces of modern business of which are awaiting the test of time and which are typical of the radical changes which are occurring from year to year. It is not surprising that most of the older school of business man are bewildered by the new order of things, BES and facility with which new methods are adopted and old methods, if in use for decades, are scrapped. New inventions and new methods of producing old products at a lower cost staggers the imagination. Newman is that the merchandising are revolutionizing industry. Competition is the order of the day, and it is cropping up taxing the capacity of business executives to maintain their patients. And a crêpe, it has failed to show the normal increments that one naturally

10 years ago competition, tumult business. In objects. Who would have predicted that tobacco would ever compete with sugar confectionery industry is making the cotton manufacturing industry has been standing still while the rayon business has been expanding enormously. This simple change in women's styles from long skirts to kneelength dresses has been one of the several factors that have greatly depreciated the value of investments in cotton mills, and made millions for the manufacturers of rayon stockings.

Competition accelerated

Fuel oil for domestic household consumption is replacing a certain amount of coal that would have been used otherwise, but no sooner is fuel oil well established as a commodity for heating the home then along comes the gas industry with household heating appliances. Since gas is manufactured from coal, the coal industry can look for some compensation on this score. Hydroelectric power plants are supplying a considerable volume of electric current which otherwise would have required coal as fuel, but in this case it is supplementing coal and is not available in such quantities as to supplant coal. Nevertheless, fortunes are being made in the development of new hydroelectric power companies. A decade ago natural ice applied practically the only means of refrigeration in the household; today the electric refrigerator is a formidable competitor. But hardly is the electric refrigerator in the field when along comes a refrigerator that consumes gas. Electric locomotives are leading to a considerable displacement of steam locomotives. The effect of this has not been particularly detrimental to the owners of locomotive builder's stocks, but it has stimulated the business of manufacturers of electrical machinery.

Copper metal goes up in price and we find aluminum being used as a handy substitute for many purposes. Rubber has already displaced a great deal of sole leather and the sole leather industry is laboring under a handicap accordingly. Prohibition has stimulated the sale of ginger ale beyond imagination.

A long about the time the street railways began to clamor for more than the traditional nickels fair, alert individual swarmed into the field with jitney buses. Today in many sections of the country abandoned street railway tracks are the only remainder of what used to be the most popular means of transportation 20 years ago. Now motor trucks are monopolizing the highways, if you ask the driver of a pleasure car, and we have visible evidence that the railroads are losing a certain amount of business that they formerly carried. Today the airplane is firmly entrenched in the business of carrying mail, and it is making a bid for some of the long-distance passenger business of the railroads. The radio temporarily put the photograph out of business until the photograph people develop something new which made it valid a valuable adjunct to the radio.

The telephoto is becoming a serious competitor of the telegraph. Pictures are being sent by wire, and frequently it is quicker and more accurate to send a picture of a letter or a long news story than to send a telegram. The silent movies have been displaced by the talkies, and both of them are wondering what the effect of television will be upon their business.

New sales methods

Merchandising methods are showing no less radical tendencies to change. The chain store has revolutionized retail distribution and greatly affected wholesale houses and jobbers in some lines. The mail-order houses going after the department store business and department stores have switched to the offensive by uniting in chains themselves.

Even banking is moving out of its traditional lines. National banks are going after the business of investment bankers. Trust companies are absorbing a great deal of the business formerly done by lawyers as executors and administrators. But investment bankers are turning around and organizing trust companies, and to the extent that they handle incidental commercial banking they are coming into competition with the banks. The finance company is taking care of a great deal of the old-fashioned commercial credit. Instead of a merchant of borrowing from his bank to carry a line of goods on his shelves, his customer borrows from the finance company and pays for his goods in installments.

Nonbanking lenders are now rushing funds to Wall Street to the extent of two or three billions of dollars in doing a business that was formerly done by banks. Many corporations are lending more money in Wall Street than the average country banking institution can offer.

Business methods and customs are changing more rapidly than they ever have before. The spectacular advances in stocks have led many to raise the cry of inflation where only normal appreciation under the new order of things is being discounted. It explains why some people regard certain stocks is cheap which are selling at 20 times their earning power, and why the same people believe other stocks are dear at 10 times their earning power or less. So radical and so rapid are the changes that it is no wonder we are uncertain as to which, if any, are responsible for our national prosperity.


Why this prosperity?
by Donald Rae Hanson
Forum Magazine, August 1929

From Wikipedia: " The Wall Street Crash of 1929, also known as the Crash of ’29 or the Great Crash, was the most devastating stock market crash in the history of the United States, taking into consideration the full and longevity of its fallout. Three phrases—Black Thursday, Black Monday, and Black Tuesday—are used to describe this collapse of stock values. All three are appropriate, for the crash was not a one-day affair. The initial crash occurred on Black Thursday (October 24, 1929), but it was the catastrophic downturn of Black Monday and Tuesday (October 28 and October 29, 1929) that precipitated widespread panic and the onset of unprecedented and long-lasting consequences for the United States. The collapse continued for a month.

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