100 years of investing: The triumphs and catastrophes that changed investments forever—part II
Picking up exactly where we left off on the last podcast, discover how the US segued from the 1930’s depression era to 50’s prosperity and back into a 70’s style recession.
What investments proved to be resilient and which ones failed to gain traction? Travel back in time to a housing boom, a reset on the US financial system and a time when inflation reached double-digits. It’s the mid-20th century and times are changing!
Remember: All investing involves risk. The content of the podcast is for informational purposes only and is not investment advice. Please always use caution and diversify.
Hello and welcome to the 21st episode of Alternative Investing. I’m your host, Trevor Kraus, Communications Manager at MyConstant.
In my last podcast we went over how people invested at the turn of the century up until 1929. This was a time where people were getting 5% interest rates in their savings accounts, there wasn’t a whole lot of regulation on banks. By the time the 1920’s came around, the stock market hit its stride and people were making—or should I say spending—lots of money.
By the time the stock market crashed in October 1929, it would take a good ten years for things to recover.
This is a little off topic and I’m paraphrasing a bit, but I found it interesting. I didn’t know until recently, the stock market crash of 29’ was actually one of the top reasons that the Nazi’s came to power in the early 1930’s.
The reason this happened was that after WWI, the US lent a lot of money to Germany to rebuild their country and when the crash hit in 29’, bankers in the US immediately turned to Germany to collect the debt. Hyperinflation skyrocketed and this hurled Germany’s economy—which was already devastated by the war—into an even deeper financial crisis.
Of course, the Nazi party tapped into the Gemans anger and frustration over this situation and scapegoated the Jews by saying they were all linked to the banking system. This financial strife helped the Nazi party win some crucial elections and from 1933 onward, that’s when things really started going haywire in Germany.
Of course, that’s an entirely different topic that you can learn even more about through one of Netflix’s many documentaries on WWII or the History channel.
By the height of the great depression in 1932, unemployment rose to 25%. People’s wages were cut in half and it was an all around disastrous situation to be in.
What’s interesting about America’s great depression is that it boosted the wealth of some of America’s most famous families. The Kennedy’s for example emerged from it wealthier than ever. Believing Wall Street to be overvalued, Joseph Kennedy senior sold most of his stock holdings before the crash and made even more money by selling short, betting on stock prices to fall. He then invested in the film industry and made even more money there.
Oil tycoon J. Paul Getty abided by a simple business formula: “Buy when everyone else is selling, and hold on until everyone else is buying.” Getty purchased Pacific Western Oil Company and shares of Tide Water Associated Oil Company, the country’s ninth-largest oil company. Five years after buying Tide Water shares for $2.12, they were worth more than $20.
Howard Huges, Mae West, Charles Spalding are some of the other people who made out very well during the depression.
During the Great Depression, if you were to go and invest your money, treasury bonds are mostly what people turned to. If they had money, people were averse and scared off by the stock market and just wanted something that would earn them a relatively safe return.
Of course, during this time, banks were not giving loans and they were—along with the stock market— going through some huge reforms that would improve them in the future.
By 1933 President Roosevelt’s New Deal began to be enacted and these were sweeping reforms, regulations and social programs that would help the public and the economy.
There was the banking reform, monetary reform and most importantly the securities act that would regulate the stock market to help avoid abuses by stock brokers that played a part in the crash.
Depending who you talk to, different historians will place more importance on The New Deal or WWII in terms of which factored more into getting the US out of the depression. I’m not a PhD historian, but based on what I’ve read and learned about this time period, it was probably a mix of the two.
By the time the US got involved in WWII in 1941, the economy was slowly coming back to life. Building that element of trust again in these major financial institutions probably did play a major role in getting people who didn’t lose tons of money, to go back and start investing again or building up their businesses.
Of course once we entered WWII, manufacturing plants that were stagnant for over a decade began to produce machinery, weapons, tools, clothing etc that we needed to fight the war.
Another interesting, maybe off topic tid-bit, but when I was doing research I found that clothing for both men and women were very dark and kind of masculine looking during the 1940’s and I always assumed that was a style choice.
But it wasn’t! The factories that produced clothes were doing so mostly for the military. So they were almost entirely devoid of colors. Compared to later on in the 50’s where it was pastels and technicolor. But I digress.
Most of the 1940’s was fighting WWII and getting out of the depression. It’s the 1950’s where America, in particular, hits its stride.
People who came to adulthood in the early to mid 1950’s, had grown up penny pinching and largely in poverty. After the war, workers—particularly middle class people—were making the highest salaries in their fields anywhere in the world.
This rapid influx of money, especially in the middle class, made people spend money. Much like in the 1920’s, now, there were so many new gadgets that you wanted to buy and needed to have.
So, where in the 50’s were people investing their newfound wealth? Well, for one—real estate. Post war America’s packed their bags and moved to the burbs. Housing back then was fascinating because many of these suburbs that we know of now, were really summer retreats.
Areas like Long Island and Westchester County or the outer parts of Philadelphia and DC—these areas were rural countryside. You could drive miles and not see another home.
In the 50’s massive developments popped up. Many of which were prefabricated homes. If you’re from the New York or Philadelphia or Maryland area, you’re probably familiar with Levittown. These are huge suburban areas (7 or 8 of them) that were developed by William Levitt in the 50’s. Very self contained neighborgoods—very Leave it to Beaver esque.
If you weren’t investing in real estate, you would have gone to the stock market. But remember, by the 50’s people were still deeply scarred by the great depression and everything that came with it.
According to the first share owner census undertaken by the New York Stock Exchange (NYSE) in 1952, only 6.5 million Americans owned common stock (about 4.2% of the U.S. population). Most people in the 1950s stayed away from stocks. In fact, it was only in 1954 that the Dow Jones Industrial Average (DJIA) surpassed its 1929 peak—a full 25 years after the crash.
The process of investing was also more time consuming and expensive in the 1950s than it is now. Thanks to the Glass-Steagall Act of 1933, which prohibited commercial banks from doing business on Wall Street, stock brokerages were independent entities.
Fixed commissions were the norm, and limited competition meant that these commissions were quite high and non-negotiable. The limitations of technology in those days meant that the execution of stock trades, from initial contact between an investor and a broker, to the time the trade ticket was created and executed, took a considerable amount of time.
Investment choices in the 1950s were also quite limited. The great mutual fund boom was still years away, and the concept of overseas investing was non-existent.
Active stock prices were also somewhat difficult to obtain; an investor who wanted a current price quotation on a stock had few alternatives but to get in touch with a stockbroker.
Although thin trading volumes reflected the relative novelty of stock investing at the time, things were already beginning to change by the mid-1950s. 1953 marked the last year in which daily trading volumes on the NYSE were below one million shares. In 1954, the NYSE announced its monthly investment plan program, which allowed investors to invest as little as $40 per month.
This development was the precursor to the monthly investment programs that were marketed by most mutual funds years later, which in turn led to the widespread adoption of stock investing among the US population in the 1970s and 1980s.
Investing, as well as the US economy in the 1960’s was somewhat similar to that of the 50’s. But turned up a few notches—things were changing and by the end of the 60’s, the US was in turmoil.
Many historians describe the 50’s as complacency. People were making good money. With the exception of the short lived Korean war, we weren’t in any major global conflicts. It was definitely a time of coasting and relaxing from the wars of yesterday.
By the time the late 60’s came around, the the US was embroiled in the war in Vietnam, there was civil rights, feminist movement, and the media had become a major player in influencing public opinion.
Investing as well as the economy in the 1970’s is often a forgotten time—even though it was an important time. One that featured two economic catastrophes.
By the late 60’s, early 70’s, people were back (albeit cautiously) to investing in the stock market. The top biggest companies that you’d be investing in were general motors, exxonmobil and Ford. Obviously, you have one oil company here and two companies that rely heavily on oil. Which will have major consequences coming up.
Unlike the crash of 29’ which occurred over the course of 5-days, the market crash in 1973 was a gradual one. One that historians say started January 1973 and didn’t hit rock bottom until 2 years later. At this point in time, the crash was the worst economic downturn since the great depression.
Nixon put the final nail in the coffin to the Bretton Woods System which terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency.
If you don’t know, The Bretton Woods system of monetary management basically established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan immediately following WWII.
This system was the first example of a fully negotiated monetary order intended to govern monetary relations among different countries. The main features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its currency exchange rates within 1 percent by tying its currency to gold and the ability of the International Monetary Fund (IMF) to help countries when they couldn’t pay.
Shortly thereafter, many fixed currencies (such as the Pound) also became free-floating. The Bretton Woods system was over by 1973 which contributed to floating exchange rates.
Beyond the Bretton Woods system collapsing and people rapidly losing faith in Vietnam and then President Richard Nixon, The US and other allied countries were slapped with an oil embargo in the fall of 1973.
At the time, most of the world’s oil was sourced countries in the Middle east, and this embargo came Immediately following President Nixon’s request for Congress to give 2 billion in emergency aid to Israel for the conflict known as the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) instituted an oil embargo on the United States.
The embargo ceased US oil imports from participating OAPEC nations, and began a series of production cuts that altered the world price of oil. These cuts nearly quadrupled the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974.
The embargo was officially liften in March of 1974, but for almost 6 months it wreaked havoc on the US economy and thrusted us into a period known as Stagfation.
Stagflation is a portmanteau of the word stagnant and inflation. The overall economy was stagnant and the US dollar was experiencing major inflation. In the 1970s, slow growth along with rapidly rising prices—raised questions about the assumed relationship between unemployment and inflation. In fact, by 1979, the inflation rate in the US was at a staggering 12%.
During the 1970’s the stock market was seen as volatile so people were looking to put their money elsewhere. Up until this time oil was seen as a stable commodity but with the embargo it made people think twice.
The people who invested in alternative energy made out quite well. Along with real estate investments. At this time many cities in California in particular began to see major housing booms.
This seeking of alternative investments that we experienced with the crypto boom after the 2008 crash, was mirrored back in the 1970’s.
So how did the US escape this economic recession? Well, different economists and hiostorian will cite different factors. But as we know, then President Jimmy Carter, failed in his re-election bid in 1980 and in came Ronald Regan.
Almost immediately, Ronald Regan signs the Economic Recovery Tax Act (ERTA), a package of tax and budget reductions that set the tone for his administration’s trickle-down economic policy.
During his campaign for the White House in 1980, Reagan argued on behalf of “supply-side economics,” the theory of using tax cuts as incentives for individuals and businesses to work and produce goods (supply) rather than as an incentive for consumers to buy goods (demand).
In Congress, Representative Jack Kemp, Republican of New York, and Senator Bill Roth, Republican of Delaware, had long supported the supply-side principles behind the ERTA, which would also be known as the Kemp-Roth act.
The bill, which received bipartisan support in Congress, represented a significant change in the course of federal income tax policy, which until then was believed by most people to work best when used to affect demand during times of recession.
The ERTA included a 25 percent reduction in marginal tax rates for individuals, phased in over three years, and indexed for inflation from that point on. The marginal tax rate, or the tax rate on the last dollar earned, was considered more important to economic activity than the average tax rate (total tax paid as a percentage of income earned), as it affected income earned through “extra” activities such as education, entrepreneurship or investment.
Reducing marginal tax rates, the theory went, would help the economy grow faster through such extra efforts by individuals and businesses. The 1981 act, combined with another major tax reform act in 1986, cut marginal tax rates on high-income taxpayers from 70 percent to around 30 percent, and would be the defining economic legacy of Reagan’s presidency.
These tax cuts were designed to put maximum emphasis on encouraging innovation and entrepreneurship and creating incentives for the development of venture capital and greater investment in human capital through training and education.
The cuts particularly benefited “idea” industries such as software or financial services; fittingly, Reagan’s first term saw the advent of the information revolution, including IBM’s introduction of its first personal computer (PC) and the rise or launch of such tech companies as Intel, Microsoft, Dell, Sun Microsystems, Compaq and Cisco Systems.
At this point we’ve been bought into the 80’s and things are looking optimistic. I think I’ll wrap up today’s podcast here and in two weeks you’ll get a conclusion. There’s more to go.
But before I go, we were just talking about the recession in the 1970’s and how people were looking at places outside of commodities and stock market ot invest in.
MyConstant offers you stable, consistent returns with crypto-backed investing on your USD and gives you 4% APY to lend your stablecoins as well as 4% APY in your anytime instant-access.
Predicting things like economic downturns aren’t the easiest things to spot so it’s good to diversify your investments and do some alternative investing.
Thank you for listening today. As always if you have any questions, or if you feel like you have something to add to today’s podcast, feel free to email me at [email protected]
You’ll hear from me in two weeks. Good bye for now!
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