By Carl Watner
As I write this, mid-March 2020, the stock market has lost almost 30% in dollar value from its nominal high of nearly 30,000 as measured by the Dow Jones Industrial Average Index, and oil has fallen from about $60 a barrel to around $30. It brings to mind Bob Prechter and his 2002 book, CONQUER THE CRASH, in which he described “how to survive and prosper in deflationary depression.” In looking over Issue 145 in which I discuss his ideas on social mood, I found a quote I had taken from a book on the effects of the Great Depression of 1929.
When the bottom dropped out of the stock market, the wealthy were hit first. But it wasn’t long before the Depression came sweeping through our little town. “The banks went broke and closed their doors. It was hard to believe that the money we’d saved there was really gone.”
– Cecil Culp in WE HAD EVERYTHING BUT MONEY (Deb Mulvey, editor, Greendale: Reiman Publications, 1992, p. 14).
Listening to a radio interview a few months ago which focused on the effect of the Great Depression in South Carolina, the general consensus was that economic conditions in South Carolina were so bad in the decade before 1929, that the onset of the Great Depression was hardly noticed. In discussing the bank failures that occurred during that time, mention was made of a bank robbery that took place in Walterboro, SC some time during the years 1932-1933. Two men broke into a failed bank, held the cashier up with shotguns, and “took the exact amount of money, [they the robbers] had on deposit.” They went out and buried the cash, and then turned themselves over to the sheriff. A local jury refused to indict them, “and they became folk heroes.”
When I mentioned this story to a friend who was born and has lived in the upstate of South Carolina all his 74 years, he mentioned two further episodes regarding bank closures of that era. The first involved his mother who worked in a cotton mill and had accumulated $5.00, which would have been worth about one-fourth of an ounce of gold. She deposited that money in a bank in Clifton, SC, near the mill where she worked. When the bank failed, she lost her savings, and after that she swore she would never again trust a bank in her life. “Mattress savings” became her new “bank.”
The second episode is more apocryphal, but nonetheless to the point. An individual, who may have been a local merchant, deposited cash money in an Inman, SC bank late on a Friday afternoon. Monday morning the bank announced it had failed and would not re-open. The depositor – on discovering these circumstances – roused the bank manager and threatened to shoot him if he did not open the bank and return the cash he had deposited the previous Friday. The money couldn’t have disappeared that fast.
Bob Prechter in his previously mentioned book discusses how “Financial Values Disappear” in a declining stock market. For example, an investor who had a million dollar account in stocks and bonds could easily find their value quickly diminished. Once a buyer and seller agree on a lower price for a share of stock, unless there are other investors who will pay more, the value of everyone’s shares decrease. The same analysis applies to loans between debtor and creditor. After a lender and borrower consummate a $1000 loan, the one has an IOU he values at a $1000 and the other has $1000 in ready money. Between the two of them, they believe they have two thousand dollars, but before the loan there was only one thousand dollars of value. If the borrower defaults, that “extra value disappears.”
The “million dollars” that a wealthy investor thought he had can rapidly become [$500,000 or less]. The rest of it just disappears. You see, he never really had a million dollars; all he had was IOU’s or stock certificates. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the point of agreement changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most investment assets in a period of deflation. [pp. 93-95]
The earlier stories related here about bank closures also illustrates the point that depositors “trusted” their banks. Obviously, when their banks failed the financial value of their accounts disappeared. However, in their minds they were not loaning their money to the banks. They believed they were depositing their money with the banks for safekeeping, much as when you check your bag with the airline or your car with a parking valet. The two men with shotguns and the individual who brandished his pistol at the bank manager believed they were simply retrieving what they previously had left with their banks to protect from thieves. In legal terminology they did not see themselves as creditors of the bank, but rather partaking in what lawyers would call a bailment. “A bailment may be defined as the transfer of personal property to another … with the understanding that the property is to be returned when a certain purpose has been completed.” It is often represented by a warehouse receipt which describes the property on deposit and the circumstances under which it will be returned to its owner.
Banks still fail, although the federal government insures most deposits against financial loss. People living during the Great Depression still probably had some experiences handling real money, as in gold or silver coins. Today, however, we have morphed into more esoteric forms of electronic money of which there is no tangible evidence except computer entries. For further reading, these issues may be explored in Murray Rothbard’s monograph on money listed below.
Walter Edgar, SOUTH CAROLINA, A HISTORY (1998), p. 499.
Ben Robertson, RED HILLS AND COTTON (1942, and reprint 1990), p. 282.
Murray Rothbard, THE CASE FOR A 100 PER- CENT GOLD DOLLAR (Reprinted 1974), p. 24.