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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The New York Stock Exchange closed for 10 days, and banks suspended specie paymentsA PARALLEL UNIVERSE Why the Beginning of the Dow Can Be Our Guide for Today The basic human motivation that underlies all economic behavior has proved remarkably unvaried over time and across space and culture. Jeremy Atack and Peter Passell SHORT PEOPLE It was an October Saturday afternoon in Tennessee when we ushered our two bored adolescent children to the rear of the main hall and up the sweeping staircase of the Hermitage, President Andrew Jacksons home 10 miles from Nashville. We would point to a silver inkstand or mahogany sewing table and say, Isnt it fascinating to see how people lived? and affirm our parental wisdom in insisting that they both attend this family outing. At the top of the staircase, the first bedroom on the right was furnished with antiques from the 1870s and 1880s. The bed displayed there elicited the first sign of interest in Americana that afternoon. How could a grown man sleep in that?! This starts the conversation, held by almost anyone who has visited historic homes, about how much shorter people were in previous centuries. It is reasoned that mankinds march of progress increasingly elevates lifestyles, thereby promoting good health, which results in ever more robust physiques. The part about the height and prosperity correlation is true;1 the in creasingly elevated lifestyles part is not. It is natural for us to believe that progress is linear, that we advance along a continuum where there is comfort in the belief that tomorrow will always be better. We conclude that chronology and sequence must dictate similarities and seek clues to the future by spotting a trend. But the evidence shows that sometimes transformation can double back. One of these times was the 1970s and 1980s, when Americas growth stalled and then reversed itself, until we no longer had the worlds leading economy. Another time was the 1870s and 1880s, when in similar fashion prosperity and living conditions deteriorated to a level well below that of the preceding decades. The evidence to substantiate this lies in the bedrooms of places like the Hermitage in Nashville, Tennessee. That is where you will find beds that only have to be long enough to accommodate males who are 51?2 feet tall, the average height in 1870 and 1880. The operative fact is that a century earlier, at the time of the American Revolution, people were considerably taller. Height data on recruits into George Washingtons army gathered by Robert Fogel of the University of Chicago2 attest to the imposing carriage of Revolutionary War and post-Revolutionary War Americans, reflective of their abundant lifestyle. That after decades of progress the quality of life in America regressed so sharply as to affect even the stature of its citizens is a result of the decline in prosperity that existed between 1870 and 1896. Fortunately, this turned out to be the period of an incubation interval that would rescue the economy by providing it with a new dominant investment system represented by the Dow. As seen in Figure 5.1, the height of young American males finally returned to the level of the early 1800s by the beginning of the Dows acceleration phase in the 1920s. The decline in living standards that threatened Americans in the second half of the nineteenth century must have seemed even more intolerable because of the abundance that preceded it. The expectation that a permanent condition of prosperity had set in was created by railroad expansion that had made self-sustained economic growth surge. In 1810 there were about 75,000 workers in American industry. By 1860 there were over 1.3 million.3 From 1830 to 1850 railroad track mileage soared by 36,567%.4 Americans enjoyed a productivity growth rate of 2.6% per year.5 These were the decades of the pick it and ship it business model and the first dominant investment system. Its peak years came between 1830 and the 1860s. If not for the Civil War, its prime years may have lasted even longer. Nonetheless, productivity remained higher for a longer period of time than it did during the 1950s and 1960s, the peak years for the second dominant investment system represented by the Dow. At least one of the reasons for this has to be the fearlessness, energy, and celebration of independent thought and action that typified Americans Figure 5.1 Height of American-Born White Males, 1710-1960 Source: Robert Fogel, Nutrition and the Decline in Mortality since 1700, in Stanley Engerman and Robert Gallman, eds., Long-Term Factors in American Economic Growth (Chicago: University of Chicago Press, 1986), Table 9.A.1. Note: The height of American males declined dramatically in the late 1800s and did not return to Revolutionary War levels until the acceleration phase of the second dominant investment system in the 1920s. during those years. (Chapter 8 explains how a similar generational personality will define our own new dominant investment system.) It is a dynamic culture that could hold Davy Crockett and Jim Bowie at the same time as John James Audubon and Charles Darwin and that had the Texas Rangers tracking down gunslingers at the same time that many of the nations colleges and universities were being built (see the box). With a literacy rate surpassing todays, Americans traveling in covered wagons entertained themselves with new books like Moby Dick by Herman Melville and stories like The Pit and the Pendulum by EdgarAllan Poe. The vigorous new writings of Henry David Thoreau reinforced their conviction in personal liberty and independent thought. While pioneers clattered across the prairie, the New York Knickerbockers donned the first baseball uniforms in 1852, and the word lingerie came into general circulation. Pioneers, farmers, and intellectuals across the country attended lectures on self-reliance by Ralph Waldo Emerson. After Alexis de Tocqueville visited America in those years, he used the country as a model for the ideal democratic state of the future. Louisiana State University University of Mississippi Everyone had an opinion and openly fought for it feminists, Mormons, Catholics, abolitionists, slave owners. Indians were massacred, and settlers were massacred. There was justice and there was no justice, but there did not seem to be a lot of whiners. In the poem Mediums Walt Whitman described the Americans he saw like this: They shall arise in the States. They shall report Nature, laws, physiology, and happiness, They shall illustrate Democracy and the kosmos, They shall be eliminative, amative, perceptive, shall be complete women and men, their pose brawny and supple, their drink water, their blood clean and clear. They shall fully enjoy materialism and the sight of products, They shall enjoy the sight of beef, lumber, breadstuffs, of Chicago the great city. . . .6 The accomplishments of the era inspired Thoreau to write, I know of no more encouraging fact than the unquestionable ability of man to elevate his life by conscious endeavor.7 Conscious endeavor was taken seriously. By 1857 the major cities in the East and in the Great Lakes region were connected by rail. By 1867 John Augustus Roebling had designed the Brooklyn Bridge, and the first Belmont Stakes was run. Then, just as it would exactly 100 years later, the high level of sustained productivity dropped below 2% in 1870 and remained in this depleted state for nearly the rest of the century.8 THE BEGINNING OF THE END FOR THE FIRST DOMINANT INVESTMENT SYSTEM The economic boom following the Civil War ended in the depression of 1873. One-fifth of the railroad mileage in the United States was sold under foreclosure. The New York Stock Exchange closed for 10 days, and banks suspended specie payments.9 This began 24 years of ex cesses followed by periods of recovery followed by economic retribution. The cycles of panics and depressions were so routine that they became the subject of intensive study by nineteenth-century economists, and the concept of the business cycle was born. Today, most economic texts refer to the last third of the 1800s as the peak years of the Victorian equilibrium. Authorities like Alfred Marshall concluded that the cycles of business contractions were necessary for maintaining fiscal balance, or equilibrium. Marshall explained the environment of boom and bust in mathematical terms that are still required reading in many courses of economics to this day. The term equilibrium, implying some sort of stability, was lost on the stunted Americans of the late 1800s. What were business cycles to academics was straw after straw threatening to break the backs of the majority of U.S. citizens. The Pollyanna view of the situation that came down from the rarified air of academia calls to mind the 1980s, when Wall Street jauntily declared that we were in a bull market while personal bankruptcies rose 60%, billions of tax dollars were bailing out the savings and loan industry, and the United States became a debtor nation for the first time in 71 years. While economists were busy identifying so-called cycles in the 1870s, those closer to the situation described it like this: Every man of affairs wears an unpleasant reproachful look day in and day out, with no signs of change for the better, reported the New York Times on October 23, 1873. On February 5, 1878, the paper reported, Speculation in the stock market was dull. The ursine fraternity utters the gloomiest of prognostications as to the future of values. If you had known the diminutive and disappointed Lyman Frank Baum when he was stranded penniless in South Dakota, you never would have suspected that he would eventually leave a legacy that would touch us all. He was born in the 1850s to a family whose oil business had thrived in a booming economy. He grew to manhood expecting, like most Americans of the period, that prosperity was a permanent and reasonable entitlement for hardworking, ambitious young men. By the late 1860s there were ominous signs that things would not work out as he had expected. Railroad bonds slumped in value in 186610 as profits declined. To compensate, railroads raised rates, which in turn angered farmers needing to get their crops to market. The Granger movement was formed by farmers banding together to apply pressure on state legislatures to intervene. The first Granger laws were enacted in Wisconsin in 1874 to curb price gouging. The new laws did not stop the frequent, and often violent, protests that continued for the next 20 years the situation being compounded by falling agricultural prices. In 1870 corn sold for 70 cents per bushel and then declined steadily to 30 cents per bushel by 1890. Wheat and oat prices fell 30%.11 One by one the railroads went bankrupt. We found in the literature that historians often blame the railroads problems on the falling agricultural prices. The fact is that between 1870 and 1890, the pick it and ship it business model was weakening, and less and less railroad freight was agricultural. By 1890, less than 25% of all freight carried by rail came off the farm.12 Agricultural products were slowly being re placed by capital goods and commodities, but the prices of these were falling as well. Between 1870 and 1896 copper prices fell 70%, steel rails 84%, and coal 33%.13 As the purveyors of these products made less money, and as demand fell, less product was shipped, further impacting railroad profits. Those desperate to preserve the take it, make it, break it business culture while it deteriorated in the late twentieth century (and continues to deteriorate in the twenty-first) must have taken a lesson in misguided pigheadedness from the pick it and ship it gang a century before. Then, too, instead of taking shrinking profit margins as a sign that old business structures needed replacing, it was decided that the status quo must be preserved at all costs. The railroad industry became highly leveraged and speculative.14 Financing schemes, crooked political land giveaways, and shifty debt arrangements were rationalized as sophisticated business tools but in the end did nothing to slow the rate of railroad bankruptcies.15 Layoffs and wage cuts incited protests, riots, and strikes beyond just the rail industry. Unrest extended into mining and manufacturing as declining prosperity filtered through America. The term hobo en tered the lexicon. In 1875 the American Federation of Labor (AFL) was born. By 1888, when the optimistic 32-year old Baum opened his first store in Aberdeen, South Dakota, shocking events like the Haymarket massacre16 were destroying Americans spirit, and a lower standard of living was destroying their health (see Figure 5.2). Figure 5.2 Life Expectancy of American-Born Males, 1710-1960 Source: Robert Fogel, Nutrition and the Decline in Mortality since 1700, in Stanley Engerman and Robert Gallman, eds., Long-Term Factors in American Economic Growth (Chicago: University of Chicago Press, 1986), Table 9.A.1. Note: Life expectancy of American males declined in the latter half of the 1800s and did not return to the levels of the late 1700s and early 1800s until the acceleration phase of the second dominant investment system in the 1920s. TOTO, WERE NOT IN KANSAS ANYMORE A privileged upbringing, within a culture and economy where all things seemed possible, must have helped to fortify Baum against the far less productive conditions he faced as an adult when the faltering economy overwhelmed even the government framework that had helped to create it. One might search the whole list of Congress, Judiciary, and Executive during the twenty-five years 1870-1895, and find little but damaged reputation. The period was poor in purpose and barren in results.17 As a young man Baum tried, but failed, to make a living as a playwright, actor, traveling salesman, and the owner of Baums Castorine Company, which produced axle grease. While he probably didnt get much comfort from it, Baum was not alone. In 1882 there had been 6,738 business failures, not including farms, railroads, and their bankers. By 1893 the bankruptcies of the businesses related to the pick it and ship it economy more than doubled to 15,242.18 Frustrated citizens watched the development of electricity, which most could not afford to access.19 Rapid communication and its promise of higher productivity arose with the spread of telephones,20 but their actual use was limited to the very wealthy. A book by Jacob Riis titled How the Other Half Lives was published in 1890 and became a bestseller. It exposed the poverty and squalor of life in New York City. The Sierra Club was founded in 1892 to curb the destruction of the environment by the coal, oil, and steel industries. If Baum never gave up because he believed in a more prosperous future, he must have been encouraged by the first million-share trading day on the New York Stock Exchange in 1886.21 Whether he cor rectly saw this as a sign of a new source of productivity that was percolating just beneath the surface, we do not know. But in 1888, at the age of 32, he boldly moved his wife and his children to Aberdeen, South Dakota, and opened Baums Bazaar, which did not last long before it fell into bankruptcy and he turned to publishing.22 Baum finally found himself unable to support his family when his newspaper, the Aberdeen Saturday Pioneer, went under because of the sinking local economy. He would be forced to move his family to Chicago and find work first as a newspaper reporter, then as a commission salesman. That not only Baum but also the fiscal condition of the nation TIMELINES OF PAINFUL TIMES, 100 YEARS APART 19807.6 million unemployed; Prime rate 21.5% 1979Gas rationing begins; Chrysler loses $1.1 billion (biggest loss for American company); Divorce rate up 69% in 10 years 1978Oil prices soar 1977New York City blackout affects 9 million 1976The term misery index enters the lexicon 1975Dow begins the year at 632.04, the lowest start in 14 years; vandalism and violence increase; New York homicides up 20%; rapes and robbery up 40% 1974President Nixon resigns 1973Stock market falls, recession begins 1873Stock market panic and depression 1874Ulysses S. Grant presides over most corrupt administration of the nine teenth century 1875Farm prices collapse, record number of foreclosures 187618,000 Businesses go broke, 4 times as many in 1871 Immigration reverses: 45% more people leave the U.S. than enter it 1877Erie Rail goes broke, massive strikes against railroads 1878U.S. currency plunges to lowest point 1986National debt passes $2 trillion (double that of 1981) 1984United States becomes a debtor nation first time since 1913 1983Record crime wave in New York City 198220,265 Business bankruptcies, highest figure since depression; Sili cone Valley begins first layoff 1981General Motors reports first loss since 1921 1881American Federation of Labor forms to combat unfair practices 1882Strike against the iron and steel industry (lasts four months); freight handlers close entire railroad system 1883Panic of 1883, railroad overbuilding causes more failures and strikes 1884Knights of labor shut down Gold Rail Line 1885Riots in Cincinnati lasts 6 days, 45 killed 1886Chicago Haymarket riot kills 60; 1,400 strikes TIMELINES OF PAINFUL TIMES, 100 YEARS APART 1990Drexel Lambert goes bankrupt, housing values fall, personal bankruptcies up 60%, U.S. enters recession 1989Congress passes bill to bail out S&L industry; Dow drops 190 points, largest drop in history 1988Homeless estimated as high as 2 million 1987STOCK MARKET CRASH; $500 billion in equity lost 188710 year cycle of drought, causes many farm failures 1888Best-selling book proposes government to control production and distri bution of all goods 1889Farmers and Labor Union of North America agree on graduated in come tax, government-owned railroads, and breakup of large landholders 1994U.S. stocks predicted to underperform for rest of decade 1992Poverty rises to 14.2%, highest in 9 years 1991Disposable income falls 1892Homestead Steel strikes, biggest strike of nineteenth century 1893Crash of 1893; depression lasts 4 years; Philadelphia and Reading Railroads go broke 1894Coxeys Army of unemployed march on Washington, D.C. 1895Gold reserves sink to 41 million 1896Farmers commodity prices have now declined for 33 years would be transformed into something wildly successful was not apparent to our hero as he stood penniless on the prairie in South Dakota. It was not apparent to manufacturers of equipment, rubber products, chemicals, hardware, forest products, leather products, or household goods. It was not apparent to newspaper publishers, doctors, lawyers, farmers, or bankers. And just like a century later, in 1994, on the eve of another explosion in productivity and prosperity, it was conspicuously not apparent to those on Wall Street, supposedly with their hands on the pulse of Americas financial future. As reported in the New York Times on January 1, 1896, It began with a de pression, ran into buoyancy, held the advance long enough for the enthusiasts to liquidate . . . and finally, in its closing days, witnessed a panic. To the investor the year has been a trying one. |
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