The Depression & Path Dependence

There’s a concept in both the social and hard sciences called path dependence. To oversimplify, it basically says that everything that happens influences everything that subsequently happens – and provides positive feedback to what you are going to do. It always has an influence, even if only infinitely small.

It was with this in mind that I recently read Caroline Bird’s The Invisible Scar.  It’s the history of the impact of the Depression on America – and it was written in 1966, so it’s an interesting read now (although a bit hard to find – it’s out of print).

The book is absolutely fascinating as you realize the profound effects that the Depression had on America and how they continue to resonate today.  Hence the path dependence!  What follows is a summary of what I found really interesting.

First, the stage needs to be set.  America was a much poorer place and had a much more uneven distribution of wealth.  The poor were very poor and the rich were very rich.  To put it in perspective:

In 1929 the rich did not have to work for a living.  Interest rates were high and income taxes negligible.  A nest egg of a little more than $115,000 could assure you of a safe, coupon-clipping (and tax-free) income of $5,000 a year, the target of aspiring young men.

In 1929 more of the rich were very, very rich.  A record of 513 individuals admitted to an income of a million dollars or over, a larger number than in the 1960s, where there were more than have as many people in the country.

To put that into perspective, according to this inflation calculator, $5,000 a year in 1929 was only $60,000 in 2007.  That’s not going to be anything of distinction – in fact, according to the U.S. Census Bureau via Wikipedia, 36.75% of American households had an average annual income of $60,000 or more in 2005.

The poor were also grindingly poor.  Consider the following:

In 1933, nine out of ten farmers had no electricity.  Power companies maintained that they did not need it or could not afford it.  They could not see that extending electricity to outlying farms might raise their productivity to the point where the owners could become paying customers, and when they could see it they regarded such an investment as too long-term and too low in return to be attractive to private enterprise.

More dramatic are the following:

In 1936, when poet Jim Agee explored the Tennessee mountains, he found whole families who talked Elizabethan English and who lived and died ten miles from town without ever having been there.  Some had never seen an electric light, a water pipe, or a doctor.  No tenant house had paint or more than a single layer of knotholed lumber against the winter weather.  None had screens against the fever mosquitoes.  Sharecroppers working cotton patches had to get through the winter on advances of as little as $10 a month for families of six or eight.  Many were blotched and stupid with pellagra because of limited food.  Most tenant families lacked not only privies but even newspaper for toilet paper; mountain people retired to bushes and cleaned themselves with twigs and leaves.  Many could not read or write.  The Tennessee Valley had more than its share of the millions Roosevelt saw “whose daily lives continue under conditions labeled indecent by a so-called polite society half a century ago.”

Kentucky coal miners suffered perhaps the most.  In Harlan County there were whole towns whose people had not a cent of income.  They lived on dandelions and blackberries.  The women washed clothes in soapweed suds.  Dysentry bloated the stomachs of starving babies.  Children were reported so famished that they were chewing their own hands.  Miners tried to plant vegetables, but they were often so hungry that they ate them before they were ripe.  On her first trip to the mountains, Eleanor Roosevelt saw a little boy trying to hide his pet rabbit.  “He thinks we are not going to eat it,” his sister told her, “but we are.”
A year after his defeat by Roosevelt, Hoover – who had repeated so many times that no one was starving – went on a fishing trip with cartoonist “Ding” Darling in the Rocky Mountains.  One morning a local man came into their camp, found Hoover awake, and led him to a shack where one child lay dead and seven others were in the last stages of starvation.  Hoover took the children to a hospital, made a few phone calls, and raised a fund of $3,030 for them.
It’s literally impossible to imagine this happening in America today.  Part of this is due to all the institutions that were created (quite controversially) during the Depression.  Among the standouts are Social Security:
Conservatives were outraged (at Social Security).  Insurance companies and savings banks claimed the Government was “competing” with them.  Security would take all the “romance out of life.”  Children would no longer support their parents.  Americans would be as demoralized as workers in Germany, where children brought up on to social insurance chanted, “One, two, three, four.  Only fools work any more.”  The “payroll tax” would discourage employment.
Blue Cross/Blue Shield health insurance:
Depression hastened the spread of plans for the pooling the risk of hospital bills.  In 1929, Dr. Justin Ford Kimball, of Baylor University, organized the firs Blue Cross plan to help Dallas schoolteachers and newspapermen to save up together for hospital care.  Each member paid $0.50 into a common “prepayment fund” on which subscribing hospitals drew to compensate them for an agreed number of days of care.
And food stamps/school lunch programs:
In 1938, when farm surpluses threatened again, Agriculture’s Surplus Marketing Administration began giving surplus foods to school lunches and, through stamps redeemable at grocery stores, to families on relief.  The Federal school Lunch program has been growing ever since and the food stamp plan was revived in 1964, but both are sharply focused on welfare targets.
One of the reasons why the government was able to push such then-radical ideas was that the economic slowdown was unprecedented.  A couple of anecdotes show just how colossal and unimaginable the scale of the economic impacts were:
In the 1920s, American railroads had bought an average of 1,300 locomotives a year.  In 1932, no American railroad ordered a single one.
At home, whole towns were left without enough cash to make change in the stores.  Where banks could not supply cash, employers paid off in IOUs of small denominations, which were good at least in local stores.  Newspapers and cities sometimes had to issue scrip.  When Toledo bootleggers agreed to accept it, the papers carried the story as an important news item.  In part, at least, to put a humourous face on the nuisance, Baline, Washington, issued wooden nickels.  Tenino, Washington, went Blaine one better by eventually selling enough of its wooden coins as souvenirs to buy the building of a bank that had failed.  Just before Roosevelt was inaugurated, a million Americans in 300 small communities were getting along on some locally improvised substitute for cash money.  The scarcity of change helped to make “Brother, Can You Spare a Dime” one of the most popular songs of the year.
If you had a job, you certainly weren’t going to leave it:
The quit rate is a measure of what people will endure to hold a job.  In prosperous 1929, more than three workers out of every 100 gave up their jobs each month.  In 1945, when women were leaving jobs to rejoin returning servicemen, the quit rate was more than 5 per 100.  In February 1933, it dropped to one out of every 200, just about the minimum to allow for people who faint on the job.  Among those who didn’t quit were mill girls in New England working for $4 and $5 a week, store clerks in Chicago working for a nickel an hour, and men earning $0.10 an hour at Briggs Manufacturing in Detroit.
However, it was not all doom and gloom.  The Depression led businesses to focus on consumers and there were many success stories:
The consumer was the key to success in the Depression.  The big change the Depression made in business was to reward products, firms and industries that gave consumers what they wanted.  This seems platitudinous in retrospect, but it was not so clear at the time.  Money had been made first by investing in railroads, steel mills, construction, mining, and factories.  In the boom years, money had been made in financing production and selling stock.  The Depression hit theses “capitalistic” enterprises much harder than “consumeristic” goods and services people needed in daily living that could often be realized with little investment.  Real income per capita – spendable money a family had to lay out – did not grow during the Depression decade, but it did continue to be as high as it had been in the boom.  Demand for shoes, drugs, foods, soap, cigarettes, clothes, and gas for the old jalopy grew directly with the population.  Buses, trucks, gas, electricity, stores, laundries, beauty parlours, stayed in business.
Big business had traditionally disdained inexpensive consumer goods.  Before the Crash, power companies had given away electric light bulbs in order to increase the use of current, and Muzak was developed later for the same purpose.  Before the Depression, General Electric bothered with small appliances only to increase demand for its generators.  Broadcasting was started in order to increase demand for radio sets.  During the Depression, however, light bulbs, appliances, and entertainment launched as bait became products worth selling in their own right.
“Consumeristic” companies did better than competitors who were farther away from the retail customer.  Both Shell and Gulf lost out to the Standard Oil companies because they were slower to develop gas stations as outlets for their products.  Gulf had to build its way back by investing in a national system of leased stations.
Here are different examples of successes.  Note the common theme of focusing on consumers’ unmet needs or capitalizing on the build-out of long-term technological trends like the automobile and electrification:
(General Robert Elington) Wood (head of Sears) claimed the formula was simple: “The customer comes first, the employee next, and the stockholder last.”  Wood studied the consumer.  Instead of trying to make existing products as cheaply as possible, he developed new products that fitted into the changing way of life he saw around him.  He developed suppliers who could mass-produce “class” products.  Refrigerators sold well even in the depth of the Depression, so Wood brought out a low-cost Sears refrigerator to capture this market.  He was one of the first marketing men to see the potentials of the automobile.  One of his achievements for Sears was to offer automobile insurance-at low cost, by mail-before the established insurance companies were willing to promote coverage for the new risk.  Bust most decisively, he saw that the family car meant trips to the store, so he added retail stores to the mail-order business.
Many enduring little businesses grew up around the automobile, which surprised everyone by becoming a necessity rather than a luxury.  House trailers, auto radios, motels, drive-in theaters – all these small services flourished, and none of them developed by people with substantial capital.  Established banks did not at first lend customers money to buy cars, and established insurance companies shunned the growing market in automobile liability.
The typical success story of the Depression is a consumer product that did not at the time seem worth the notice of a grown man, peddled by a persistent promoter who was not considered eligible for bank credit and had to scrounge for money to expand.  A good example is Lawrence Gelb, a bright N.Y.U. graduate in chemistry, from the Bronx, who started manufacturing Clairol hair colouring during the Depression and peddling it himself.  Everything about hair dyeing was questionable.  Nice women would not talk about it (one of Gelb’s contributions was to avoid the word “dye” and use “colour” instead).  Hairdressers did not know how to apply it, and they feared, with some justification, that their customers might sue them for injurings arising out of accidents in applying the dyes.  Banks would have nothing to do with the business.
Gelb was not deterred.  For promotions, he wangled a free write-up in The Chicago American, which sold out his supply in that city.  He wangled credit from bottle manufacturers and extended credit to jobbers so they could put the product into beauty shops on credit.  By 1950, Gelb had persuaded young women to change their hair with their moods.  In 1959, he sold Calirol to old-line Bristol-Myers for $22.5 million and become one of its vice presidents with a lordly layout in the head office in Rockefeller Center.
Banks went after the man in the street.  Before the Crash, few householders paid their small bills by check.  Banks discouraged small deposits by requiring a minimum balance.  They wanted only checking accounts big enough so that the use of the money would outweigh the expense of handling the check.  In 1934, Alexander Efron started the check-master Plan, under which anyone could draw a check for a nickel against an account that could be opened for as little as a dollar.  By 1938, more than 300 banks were attracting people into the bank by offering small checking accounts and other services.
In 1936, Life launched a new style of “photographic journalism.”  It was so successful that Look and other competitors soon appeared.  “The March of Time” made the newsreel a major feature instead of a filler.  The artistic flowering of photography set ordinary people with the price of a Brownie to snapping the American scene, as well as each other, all over the country.  Cameras and film were one of the growth industries of the Depression.
Fortune and Esquire were also both started during the Depression.  Also, direct sales became popular:
Companies increased sales at little expense by inducing the unemployed to sell on a commission basis.  The harder the times, the better the talent that sales managers were able to enlist.  Alfred C. Fuller reports that sales of his Fuller Brush Company “suddenly upended, like a tired freighter, and headed toward the bottom” during the prosperous closing years of the boom, but jumped $15,000 to $50,000 in the doldrum month of August 1932 alone, and grew at the rate of a million dollars a year all through the Depression.
Businesses also became much more professional, as the Robber Barons of the Gilded Age handed their business over to managers, not children:
His (Henry Ford’s) rival, General Motors, was the model and in large part the creator of the rising management system.  This system was born not in the automobile business, but in the chemical industry, where technological advance dealt more ruthlessly with enterprise.  In the stock-market drop of 1920, the du Ponts used their war profits to buy General Motors at a bargain.  They managed it the du Pont way.
Like the Rockefellers, whose oil companies gained on their competitors in the Depression too, the du Ponts did not regard their enterprises as fields for personal expression.  Both families disciplined their heirs to administer the business as a trust.  du Pont bred sons and acquired sons-in-laws competent enough to run the business.  None of the grandsons of John D. Rockefeller went into the oil business.  But both families devised ways of separating ownership from control so that members of the family could work in the business, if they chose, without personally exercising the authority of their ownership as distinguished from the moral authority they exerted because they had grown up in the tradition of the business.  And in both families, the tradition was to seek out the ablest men, reward them handsomely, and give them authority and status to develop the business as if it were their own.
One unforeseen offspring of professionalized management and a focus on consumers was the birth of advertising, consumer research and PR:
Theodore Vail, the manager who created the Bell System, taught telephone operators to cultivate “the voice with the smile” to avoid attacks that could have led to “postalization” or Government operation of the phone service like the mails.
Businessmen hastened to adopt the tactics these leaders (Rockefeller et al.) had developed.  U.S. Steel, Bethlehem Steel, General Motors, International Harvester, Pittsburgh Plate Glass, and the New York Central Railroad set up public-relations departments during the 1930s.
Young & Rubicam retained opinion pollster George Gallup to study consumer attitudes.  In 1933, A.C. Nielsen, back from Bermuda with a few dollars and a bright idea, launched a service that measured the movement of branded merchandise off store shelves.
Some of the lasting results of the Depression are a little less significant.  Take, for instance, how we tend to drink orange juice at breakfast:
Consider, for instance, what the Depression did to the orange. Traditionally, it was a luxury for the toe of a Christmas stocking.  During the Thirties, dietitians popularized the daily need for Vitamin C to prevent scurvy and deficiency disease.  Orange juice for breakfast, orange juice for baby’s first non-milk food, became dietary duties, the new standard of adequate nutrition.
Or the word “boondoggle”:
Within two months (of its 1933 founding), the CWA (Civilian Works Administration) was paying four million men.  They could be seen almost everywhere, standing around outdoor doing as little as possible and often in a deliberately inefficient way.  Rather than spend money on wheelbarrows, for instance, one project had men carrying dirt 50 feet by the shovelful.  Hastily improvised projects intended to be temporary were often just silly.  A FERA (Federal Emergency Relief Administration) director in New York City told a reporter he was teaching men to make “boondoggles” – linoleum-block prints, leather belts and such.  The word was needed for the new phenomenon of made work, and it stuck.
The book is fascinating and worth a read as it shows you just how influential this brief period continues to be in defining the America we live in.  I highly recommend reading it.
PS For your reading pleasure, here are a couple of random items from the book that I thought worth sharing, but didn’t really fit with the above.
First, a few Soviet engineers almost ended up being on the wrong side of a Communist rebellion within America:
On March 7, 1932, seventy Soviet engineers watched 3,000 unemployed attack the Ford plant in Dearborn in the nearest thing to revolution ever abetted by the Communist Party, U.S.A.  They were inside the plant, invited there from Russia by Henry Ford to learn mass-production methods.
While consumer goods manufacturers did well, nobody ever did as well as financiers (although during the Depression it was commercial finance, not Wall Street):
During the boom, manufacturers never made as high a profit as the Wall Street speculators who financed the production of the goods they made.  During the Depression, manufacturers never made as high a profit as the personal credit companies that financed the consumption of the goods they made.  C.I.T. and Commercial Credit, were on the short line of companies that made money in 1932.  The installment credit companies had prudently cut their loans to 60 percent of 1929, but they collected all but one percent of the money they lent between 1929 and 1932.
Early Americans must have been ruthless in saving their money.  I remember my grandparents (who weren’t American but grew up during the Depression) as saving money fastidiously.  However, note what people were saying about the younger version of my grandparents:
But if the escapees from poverty did not tell their children about it, they did accumulate things with a ferocity that looked pathological.  The children of Depression seemed to be acting out the resolve of a girl who wrote the New York Times the day of the Bank Holiday that she intended to spend every cent she would ever lay her hands on and enjoy it, rather than “wait for it to be swallowed up by others in some mysterious fashion.”  Margaret Mead’s service with the rationing authorities during the war convinced her that the Depression made people teach their children to grad instead of to plan.
If people coming out of the Depression accumulated with “ferocity”, I shudder to think what judgments would be made of us today.
Finally, I love this anecdote as it shows just how much America changed in the 40 years between 1905 and the end of World War II.  It definitely grew from teenager to experienced adult at a rate no nation has since matched (although who knows if China or India will):
Whenever my father went to Washington during the New Deal days, he was reminded fondly of the time he dropped in on the Secretary of State in 1905 with nothing much more on his mind he would have had dropping in at his hometown country courthouse.  In those days, he recalled, the Secretary of State did not have pressing business every day, either.  Father just walked through the door in the Old State Building which said “Secretary of State” and introduced himself to the man at the desk.  It was the Secretary himself.  “My name is John Hay”, he said.  “What can I do for you?”  Hay was Lincoln’s old private secretary, but the easygoing Government manner in which he was brought up lingered as an ideal almost until World War II.