Lessons Of The Great Depression: Preserving Wealth Amid The Covid-19 Crisis
The hobbled American economy lies uneasily under what has been described as an “induced coma.” Lessons Of The Great Depression: Preserving Wealth Amid The Covid-19 Crisis
Across the nation, businesses have been shut down entirely or significantly curtailed to stanch the spread of the coronavirus that has already infected more than 1.2 million people in the U.S. and killed more than 81,000.
As a consequence, the nation’s unemployment ranks have soared. In April, the pandemic cost the U.S. 20.5 million jobs, driving the nation’s unemployment rate to 14.7%, according to the Labor Department. That is the highest jobless proportion since the 1930s.
As historians and economists look back now on the Great Depression, they readily point out that the circumstances surrounding the workforce and fiscal crises of today and nearly a century ago are dramatically different. However, they note, there are enduring lessons from the Depression, including ones concerned with the preservation of wealth.
“Knowing when to get out of the market and knowing how to take advantage of a falling market are the two key pieces of the puzzle,” says Eric Rauchway, distinguished professor of history at the University of California, Davis. “Two prominent examples that are often cited tell essentially the same story.”
The pair is Bernard Mannes Baruch and Joseph Kennedy, who have left indelible marks on the worlds of American business and politics.
“Both are known as market manipulators and operators,” says Rauchway, whose books covering the era and its star players include Winter War: Hoover, Roosevelt, and the First Clash Over the New Deal and The Great Depression and the New Deal: A Very Short Introduction.
“Baruch and Kennedy had the same sense that too many people were coming into the market.” And they both liquidated stock investments before the calamitous crash.
Baruch, a financier and political consultant who died in 1965 at age 94, had already seen a number of panics in the market by the time 1929 rolled around, according to Rauchway.
“He said he always knew when people were coming into the market who were inexperienced, who were buying on the expectation of a rise in prices and not a real deep knowledge of the underlying values. Baruch talks specifically about things being too expensive at the price, which is the same kind of language you hear now from Warren Buffett.”
Like Baruch, who timed his exit from the market with aplomb, Kennedy once said, “Only a fool holds out for the top dollar” in a reference that he saw signs that stocks were overvalued. (Kennedy, the patriarch of the U.S. political dynasty that resulted in three sons becoming U.S. senators and one going on to the presidency, died in 1969 at age 81.)
“He knew the market well enough to act on his own advice, get out before the crash, and put his fortune safely in government securities,” reads an exhibit that is part of the Securities and Exchange Commission Historical Society virtual museum.
Knowing when to leave was only one wealth-protecting tactic practiced by the pair. They also capitalized on the dynamics of a falling market.
“When they got out of the market, they short sold to some extent and made money off of that,” says Rauchway, adding that the strategy wasn’t without its own gambles. “You bet on prices going down. That can be risky.” (Kennedy’s reported net worth in the early 1930s was $180 million; Baruch’s wealth then is said to have been $16 million.)
Amid the ever present risk, there was also the factor of good fortune. In 1930, after the death of his father, J. Paul Getty received a $500,000 inheritance and took over the family oil company. He gambled on purchasing oil company stocks.
“I was fortunate due to my father’s foresight and my good luck,” Getty once said, a New York Times obituary noted. “In the Depression. I did what the experts said I should not do.” By 1957, Fortune named him the richest man in the world, according to Biography.com. At the time of his death in 1976, Getty’s wealth was estimated to be between $2 billion and $4 billion.
Standard Oil Company head John D. Rockefeller, whose business practices led to antitrust laws, had retired from day-to-day business operations and presents another view of navigating hurdles and holding on to wealth. By the time of his death in 1937 and in the years leading up to it, he was known for his philanthropy. When he died in 1937, he’d already given away $530 million to charitable causes. His son, John D. Rockefeller Jr., carried on the legacy of family philanthropy.
In a 1992 article titled Rockefeller Family Tries to Keep a Vast Fortune From Dissipating, the New York Times reported that “In 1934, John D. Rockefeller Jr. established trusts for his daughter and five sons that consisted of oil company stocks and real estate holdings. These trusts still hold the bulk of the fortune.
Another set of trusts were set up in 1952 for his grandchildren, the fourth generation of the family. When family members die, their trusts divide into new trusts for their children.” Planning for the future and having luck on your side can be valuable assets.
“Did luck play a role in preserving wealth?” says Laura Veldkamp, a professor of finance in the graduate school of business at Columbia University. “Of course. Talking about today, if you’d gambled on investing in pharmaceuticals—or, perhaps, the makers of toilet paper—you’re doing much better than if you’d risked your money on hospitality.”
Even with such parallels, scholars agree that 2020 and 1929 are different worlds. “Obviously, we’re not in the same situation today as 90 years ago,” Rauchway says. “We haven’t had the massive boom the way they did in the 1920s.”
Indeed, while there are differences in the market, there are also dissimilarities in the unemployment metrics.
“The thing most people remember about the Great Depression is unemployment. There was such a huge human metric,” said David M. Kennedy (no relation to the Joseph Kennedy family), emeritus professor of history at Stanford University in California and the 2000 Pulitzer Prize-winning author of the nonfiction book Freedom From Fear: The American People in Depression and War, 1929-1945. “That must be on people’s minds when they look at what’s going on now.
“But here’s an instance of what looks to be comparable but really isn’t,” Kennedy says. “When we talk about the 25% unemployment rate in 1933, because of the demography of the workforce, it was 25% of households. Today the typical household has two wage earners in it. A 20% unemployment rate today doesn’t translate easily into 20% of all households they way it did in the 1930s.”
With Gross Domestic Product (GDP) now down a whopping 12%, Price Fishback, professor of economics at University of Arizona and a research associate with the National Bureau of Economic Research, understands why people are flashing back 90 years.
“That’s a huge drop, so I understand why people are thinking about the Depression,” he said. “But it’s not similar in the following sense—we know why this is happening. In the Great Depression, we really didn’t know what was going on, and it lasted for more than a decade. There were so many things that went wrong.
“Now we know exactly why we’re in this position,” added Fishback, who’s been researching the Depression era and the New Deal for two decades for an in-the-works book he is co-authoring. “We shut down the economy to save people’s lives and to make sure we don’t overrun the hospitals. We did this on purpose.”
Nonetheless, knowledge only goes so far. How long will the viral shutdown last? That’s the $2 trillion question. “Is it going to snap back like a rubber band? Or will it take longer?” Rauchway says. “The longer the virus lasts, the longer the recovery.”
“If you ask me to guess what’s coming, and it would only be a guess, this is unlikely to turn into something like the Great Depression,” he says. “That lasted 11 years. Imagine a worst-case scenario—say we don’t get an effective vaccine for, say, four years—and that’s terrible. But it’s not 11 years.”
Veldkamp, like others, is optimistic and hopeful that the coronavirus crisis will end sooner rather than later. Either way, there will be trauma. “But I think we’ll also get new technology, new gains, new productivity, and new ways of doing things out of this,” she says, adding Covid-19 is “just like wars. They create lots of devastation but also contain the seeds of new innovations, developments, and technology for what comes after.”
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