Blog Podcast 100 Years Of Investing: The Triumphs and Catastrophes That Changed Investments Forever

100 Years Of Investing: The Triumphs and Catastrophes That Changed Investments Forever

date August 31, 2021 time 11 min read 2151 views

For all the investment tools and techniques that have changed over the last century, there are just as many things that remain the same. On this episode of Alternative Investing, travel back to a time when savings accounts gave you 5% interest, railroad tycoons ruled the stock market and the Ford model T was on everyone’s to-buy list. 

It’s the turn of the 20th century and investing as we know it is about to change—forever.

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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 20th episode of Alternative Investing. I’m your host, Trevor Kraus, Communications Manager at MyConstant. 

Hard to believe that I’m already up to 20 episodes on our podcast. I actually only realized this over the weekend while I was doing research. I think next time I reach a magic number like 50—we’ll do a prize giveaway. Something interactive on MyConstant. I’ll talk to our developers about it. 

Anyway, about a week ago I was on the phone with my Dad and we were talking about a treasury bond that needed to be released because it wasn’t making any money. I think I’ve talked briefly about my father on this show, he’s a financial advisor for Morgan Stanley, he’s in his mid 70’s but you wouldn’t know it if you saw him—he looks good for his age. And he’s been in finance from before I was born. 

Anyway, my fathers ideas of investing your money are almost entirely rooted in the stock market, financial instruments and real estate. We briefly got on the topic of peer-to-peer lending and cryptocurrencies and when those came up, he was either lost or skeptical. 

This conversation got me thinking about how different generations invest or invested their money. And the things in society that lead to these changes. Innovation, technology, regulatory changes and evolving investor preferences.

Think about it, before the housing crash in 2008, no one had a clue or had ever heard of cryptocurrency and now it’s become one of the hottest places to invest your money. 

At one point in our history, the stock market was not seen as something for “everyman” to play. People would only invest or hold shares in a company if they had a direct connection to that company. Why did this change? When did people begin to invest in the stock market? 

Much like any modern invention we have today, it’s hard to believe that at one point, we didn’t have that device. We didn’t always have smartphones, computers, TV’s etc. And a lot of that is the same with investing—things evolved over time. And at the same time, there are investing techniques and truisms that have remained the same over hundreds of years. 

So I’m going to break down how investing evolved from the early 1900’s up until today. This is a meaty topic so I’m dividing this into three podcasts. Otherwise, it would be me rattling a list off in the vein of Billy Joels, “we didn’t start the fire”. 

So! 1900’s. When I think of the early 1900’s I think of Titanic and scary hospitals. The Knick was one of my favorite tv shows and if you’ve never seen it, it takes place in a hospital in NYC at the turn of the century.

But I digress.  

Technology and innovation have been the two constants throughout history that have underpinned a wave of transformation. From the Industrial Revolution through to the Golden Age of Invention in the late 19th century, to the Tech boom and information ‘overload’ that’s rampant in our society today. 

These transformations have given rise to entirely new industries and the changes can be seen in the shifting composition of listed companies on global stock markets.

Investing, at its heart, has been around since ancient mesopotamia. People have always been looking for ways to make their money grow. Basically from 1760 to the early 1900’s the west had two industrial revolutions that catapulted us into the investing that we see today. 

The stock market that we have today officially started in May of 1792. And from that time up until about 1910, the biggest industry, or the main industry that you’d be investing in was the railroad. Rail companies made up more than half of the entire stock market. Banks came in a distant second.

In the early 1900’s however, people who invested in the stock market were mostly connected to the company they were buying shares or stock in. There wasn’t a lot of understanding about the stock market from the average person and there wasn’t a lot of literature that you could read that would make you want to put your money in stocks. At this point in time a healthy investment was seen as a house or property. 

Going back to that distant second—banks—In today’s society, most people don’t think twice about putting their money in a bank. Especially the big banks—Chase, Bank of America, HSBC. These places are FDIC and have billions of dollars in assets. They’re seen as rock solid. At least they were up until the late 2000’s—but that’s another story.  

That being said, as with any low risk investment, the interest you make keeping your money in a savings account or a CD or as I had earlier, a treasury bond—It will earn you next to nothing. Your money will stay put, but at less than 1% interest, it won’t keep up with inflation and it’ll lose purchasing power. 

Back in the early 1900’s, you could get close to 5% interest for your savings account and a bit more for a CD. Keep in mind though, banks back in the early 1900’s often went under and didn’t have the same regulations that we have today. It was fast and loose—heck, they weren’t even insured until the mid 1930s!  

And if that didn’t scare you off, the run on banks could screw you over too. Also known as a bank run. This happened twice at the turn of the century. People suspected that the banks were insolvent, so they ran to their banks and withdrew all their funds. 

Of course, this type of panicking throws the bank into chaos and then, if too many people took their money out, the banks would go bankrupt. The regulations that we have today simply weren’t around back then and it was really like the wild west of banking. Things were a lot riskier, but you could earn a lot more. 

Going back to the railroad, in the early/mid 1800’s, railway companies and business people began approaching legislators in an attempt to convince them to support railroad expansion. And it worked. Most of these major rail lines were connecting the largely developed US east coast to the west. 

By the early 1900’s the railway industry made up more than half of the entire stock market. Compare that to today where the top industries are mostly tech: facebook, spotify, amazon to name a few. 

As you can imagine up until 1908, beyond just moving freight, if you needed to get from New York to Chicago, your only option was a train. Most, about 95% of roads were gravel or dirt—not paved at all. 

By 1908 the Ford Model T was introduced. I don’t want to get into a discussion of who designed the first ever automobile. But the Ford model T was indeed the first mass produced car that was affordable for many people. This was, as they say, a “game changer” and essentially shifted focus from developing more railroads to paving roads for cars and later, in the 1950’s, highways—or if you’re out west you call them freeways. 

So, at this point pre 1920’s and just after world war one, most people’s investments were in property, gold, oil, family business, banks—whether it be a savings account or CD’s. Mostly very illiquid assets and stores of value. A small sliver of people were investing in the stock market. And remember, at this point the stock exchange has been around and accessible to people for about 130 years.

So what changed? 

Well, two things and it’s time to get into a little psychology. 1) before 1920, wealthy people in America were owners of major industries, old money, there wasn’t a great deal of mobility in your social strata and there wasn’t as much to show for your wealth. 

If you were rich at the time you had a large home, wore nice clothes, ate at fancy restaurants and that was largely it. But by 1920, the people who had invested in the stock market for the past 10, 20 years we’re making money and there we’re now more things to show off that we’re attainable.  

Maybe your neighbor who you grew up with in a middle class part of the city is now moving into a bigger home, he’s driving a Ford model T, just joined a country club, and he has all these new gadgets like a toaster. He’s not a Vanderbuilt or a Rockafeller, but he’s clearly moving upwards. And this is what psychologists and sociologists call, ‘social proof.’ This is a phenomenon wherein people copy the actions of others in an attempt to undertake behavior in a given situation.

I mentioned the Ford Model T earlier, you have to realize that at this time, the idea of being able to travel independently was mind blowing for people. Sure the toasters and other gadgets were nice, but a car meant freedom.  And many people who couldn’t afford the car outright, bought one on credit. At this time a Ford model T cost about $800. Adjusted for inflation, it’s about $13,000 today. 

Part 2 is inflation. The consumer price index was first developed in 1919, to track the big inflation of the previous several years. This was connected to 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 high rate, it marked the first time that more than a decade had elapsed in which the dollar had not held its value. During the Civil War, there were episodes of inflation, but the dollar eventually came back to normal levels. 

In the 1920s, however, the inflated price level remained sticky, holding at that 170% level. It introduced a possibility never before seen 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 the stock market in the 1920s. Prior to the 1920s, saving money in traditional instruments, including in cash and coin, enabled a person, years later, to buy all the things he or she wanted to buy when the money was first being 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. 

So it was social proof and inflation that really drove people to invest in stocks. And boy did they ever, and they did it with real abandonment. They don’t call it the roaring twenties for nothing. 

The stock market “mania,” 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. 

Mind you most people in the 20’s who were playing the stock market, were buying on margin. If you’re unfamiliar, margin trading involves borrowing money from a broker to purchase a stock. 

A margin account increases your purchasing power and allows investors to use someone else’s money to increase financial leverage. Margin trading offers greater profit potential than traditional trading, but also greater risks—as we see down the line. 

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. 

During the 1920’s you of course had your old standby investments like bonds and property, but now even the little guy can margin trade and make money in the stock market and buy all these new gadgets. The electric mixer, the toaster, washing machines, vacuum cleaners, electric refrigerators: all these cool, new things were flying off the shelves and people wanted them. 

If you’ve ever read the book, the Great Gatsby, it takes place in Long Island, New York and it’s all about the new money, high-society that was born out of the 1920’s boom.  

So, what happened? Anytime someone mentions the 1920’s I think of a roller coaster going up the first hill. It’s all good, but once it hits the crest, it’s going down. And boy did things go down at the end of the 20’s. 

While the stock market’s decline officially began following September 4th, 1929, the worst of the crash didn’t occur until more than a month later. On Monday, October 29th, the Dow Jones Industrial Average plunged by nearly 13%. The next day, the index tumbled by almost another 12%. These devastating two days have since become known as Black Monday and Black Tuesday. 

Over the months and years that followed, the stock market continued to lose value. By mid-November 1929, the Dow had declined by almost half. It didn’t reach its lowest point until midway through 1932, when it closed at 41.22 points — 89% below its peak. And the Dow didn’t return to its September 1929 high until November 1954. 

What caused the 1929 stock market crash?

The many aggressive investors of the Roaring Twenties fueled a bubble in the stock market. The constantly rising stock prices gave consumers a sense of economic optimism, influencing them to frivolously spend money on goods like cars and telephones. They were so confident in the future that they often bought items on credit. By 1927, 20% of all major consumer purchases were being made on installment plans. People in the 1920s acquired six of every 10 automobiles and eight of every 10 radios on credit.

This debt-fueled buying binge was enabled by thousands of banks and hundreds of new “installment credit” companies, which loaned money to essentially anyone who wanted it. (does this sound familiar, a la housing crisis almost 80 years later). 

Foreign lenders seeking to profit from the growing US economy eagerly supplied gold and assets to US banks, and many of the installment credit companies were simply lending arms to major US manufacturers.

Consumer debt as a percentage of income more than doubled during the decade. By September 1929, total non corporate debt in the US amounted to 40% of the nation’s Gross Domestic Product (GDP).

At the same time that readily available credit was fueling consumer spending, the booming stock market gave rise to many new brokerage houses and investment trusts, which enabled the average person to buy stocks. These amateur investors, in addition to buying stocks outright, also began opening margin accounts, which facilitate stock purchases using borrowed money.

Investors with margin accounts are usually required to pay only 10% of a stock’s purchase price initially; the stock itself serves as collateral for the remaining 90%. As investors increasingly used margin accounts to buy stocks that they could not afford, new money flowed rapidly into the stock market, causing stock prices to inflate.

The easily available leverage was compounded many times over, with both individual investors and investment trusts acquiring assets using borrowed money. Some investment trusts, themselves heavily leveraged, also invested in other similarly leveraged investment trusts, which, in turn, invested in other investment trusts employing the same strategy.

As a result, each of these trusts became disproportionately affected by the movements of others’ stock holdings. When the stock market crashed in September 1929, all of the entwined investment trusts similarly collapsed. 

In the wake of the crash, the banks and other lenders that financed the stock-buying spree had little means to collect what they were owed. Their only collateral was stocks for which the amount of debt outstanding exceeded the stocks’ worth. These institutions had little choice but to begin limiting all other forms of lending, including credit for consumer purchases.

With less available consumer credit, a lot fewer people were able to purchase big-ticket items, causing consumer spending to decline sharply. Businesses shrank or closed, resulting in millions of people losing their jobs and becoming unable to repay their own debts to the banks. The banks, too, failed by the thousands as many of their borrowers defaulted on their loans.

From this point on, the US has officially entered the great depression and there’s a lot more to come. 

I think for this episode I’m going to leave off here. I just want to note that whenever I do research like this where I’m going back 100 years in history, you invariably encounter different opinions and viewpoints on why x, y, z occurred. 

Obviously, if I had more time I could conceivably make an entire episode recounting investments of one decade. But for the sake of time, I’m giving the key points. 

That said, if you feel like I missed something major or didn’t explain something correctly, definitely drop me an email at [email protected]. If you convince me that I was wrong or missed something, I’ll correct it in the following episode. 

I think that’s all from me today. Thank you for listening and you’ll hear from me in two weeks with more of 20th century investing. 

Good bye. 

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Trevor Kraus

Trevor Kraus

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