Selling Stocks to an Uninformed Public: One Theory on the Cause of the Great Depression

In the last years of the silent film industry, the Great Depression hit America. There are a multitude of theories surrounding the causes of the Great Depression and its eventual demise. This post will look at just one theory: the sale and ownership of stock shares to a public that did not understand the workings of the American stock market. 

The works of Bernake and White both discuss the element of average Americans as stock buyers in the equation that led to the Great Depression. Specifically, White tells that:

“Since the turn of the century, the demands of industrial finances and regulation had reduced the role of commercial banks and increased the need to sell stock to the general public…many people who had never bought stock before entered the market. One identifiable group of new investors was women…Women’s magazines carried articles on how to buy stocks…While these changes are not easy to quantify, they do provide qualitative evidence of the existence of conditions that enhanced the likelihood of a bubble appearing in the stock market.”

Women were targeted by speculators and journalists who worked with capitalists as potential stock buyers. Women had become a significant part of the workforce during the 1920s, and represented a new class of consumers. Journalist Samuel Crowther wrote a lengthy article in the August 1929 edition of The Ladies Home Journal entitled, “Everybody Ought to be Rich, An Interview with John J. Raskob.” This feature specifically spoke to female readers, because it put women on par with men. 

Raskob tells readers, “If he [a married man] invests in good common stocks and allows the dividends and right to accumulate, he will at the end of twenty years have at least eighty thousand dollars…He will be rich. And because anyone can do that I am firm in my belief that anyone not only can be rich but ought to be rich.” 

Excerpts such as “The line between investment and speculation is a very hazy one…,” “Placing a bet is very different from placing one’s money with a corporation…,” “The old view of debt was quite as illogical as the old view of investment…We now know that borrowing may be a method of earning and beneficial to everyone concerned,” and “The way to wealth is to get into the profit end of wealth production in this country” made readers rethink saving and investing.

Bernake discusses the reality of “insolvency of debtors” and “the ratio of debt service to national income went from 9 percent in 1929 to 19.8 percent in 1932-33. The resulting high rates of default caused problems for both borrowers and lenders.” Still, many individuals used their savings to buy stock.

America had become a borrowing culture during the boom years of the 1920s. “Small borrowers, such as households and unincorporated businesses, greatly increased their debts.” During the early 1930s, bank restrictions made it harder for average Americans to obtain loans. This meant that the first group of borrowers to be affected were households, farmers, unincorporated businesses, and small corporations; “this group had the highest direct or indirect reliance on bank credit,” according to Bernake.

Knowing this, what role did inexperienced shareholders play as potential borrowers? Arora and Buza explain that businesses which saw their starts between 1880 and 1920, sought expansion through stock sales to finance new plants, equipment, and other elements of expansion due to current bank lending crackdowns. In March of 1929, the Fed doubled interest rates to discourage investors. In response, these corporations started lending money to speculators and new investors to stimulate stock sales. These new investors contributed to the growth and expansion of companies and corporations.

For example, Figure 1 shows the amount investors contributed to the growth and expansion of RCA, the leading corporation for radio in America. RCA was able to withstand the economic downturns of the Great Depression, and instead grow in monumental ways from the surplus income they generated. This was due to the amount of stocks bought by new investors.

Fig. 1 From “Radio Corporation of America: Summary of Operations” reports.

Who were these new investors? The American public. They had seen the stock market increase by forty-eight percent in 1928, and believed that the market would continue its climb. Arora and Buza further explain that new investors “lacked experience in buying stocks and monitoring firms. Brokers were also making loans on margin and by October 1929, the loans had reached $8.5 billion. But, only an estimated 600,000 people had margin accounts in 1929.” This suggests that personal funds were heavily involved in the purchase of stocks, as well.

      Photo courtesy Andreas Berger from Medium.com

Some new investors did make money (sometimes A LOT of money) on dividends paid out by the companies that they held stock in. Dividends were one way of paying shareholders a return on their investment; the payments may be done through cash, additional shares in the company, or the opportunity to buy additional shares at a discount. Some companies that offered dividends provided investors with a regular income as the stock price moved up and down in the market. However, an article by Green points out that during the last two years of the economic boom of the 1920s, dividends fell far behind the rise of stock prices, meaning that stocks that paid out dividends to its shareholders were not likely to make anyone as rich as it did before.

On the other hand, some new investors bought stock in companies that did not offer dividends. Companies that didn't offer dividends were typically reinvesting revenues into the growth of the company itself, which eventually led to greater increases in share price and value for investors. RCA was one of those companies. All of the money that came in from product and stocks sales, minus expenses, resulted in the gargantuan surplus of income for the company.

Two ways investors profited from stock investing were capital gains (selling off shares of stock that had increased in value over what it was originally bought at) and paying of dividends. If the stock a person owned in a company that didn’t pay dividends, then a stockholder’s only profit potential is from capital gains - meaning selling the stock to get money.  In October 1929, a panic led to a mass sell-off of stocks, causing stock prices to plummet. Subsequently, the market crashed for a variety of reasons, scores of Americans went bankrupt, and the years of the Great Depression began.

Bibliography

Primary:

Crowther, Samuel. “Everybody Ought to be Rich: An Interview with John J. Raskob.” Ladies Home Journal. (August 1929): 9, 36. https://archive.org/details/sim_ladies-home- journal_1929-08_46_8/page/n10/mode/1up. 

RCA. "Annual Report of the Directors of Radio Corporation of America to the Stockholders for the Year Ended December 31, 1928." https://babel.hathitrust.org/cgi/pt?id=mdp.39015021216877&seq=1.

RCA. "Annual Report of the Directors of Radio Corporation of America to the Stockholders for the Year Ended December 31, 1923." https://babel.hathitrust.org/cgi/pt?id=mdp.39015021216844&seq=3.

RCA. "Annual Report of the Directors of Radio Corporation of America to the Stockholders for the Year Ended December 31, 1926." https://babel.hathitrust.org/cgi/pt?id=mdp.39015021216869&seq=3.

Secondary:

Arora, Harjit K., and Michael P. Buza. "United States Economy & The Stock Market." Journal of Business & Economics Research (JBER) 1, no. 1 (2003).

Bernanke, Ben S. “The Macroeconomics of the Great Depression: A Comparative Approach.” Journal of Money, Credit and Banking 27, no. 1 (1995): 1–28. https://doi.org/10.2307/2077848.

Bernanke, Ben S. “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.” The American Economic Review 73, no. 3 (1983): 257–76. http://www.jstor.org/stable/1808111.

Green, George D. "The economic impact of the stock market boom and crash of 1929." In Federal Reserve Bank of Boston, Consumer Spending and Monetary Policy: The Linkages, Monetary Conference, (1971): 189-220.

White, Eugene N. "The Stock Market Boom and Crash of 1929 Revisited." The Journal of Economic Perspectives 4, no. 2 (Spring, 1990): 67, https://go.openathens.net/redirector/liberty.edu?url=https://www.proquest.com/scholarly-journals/stock-market-boom-crash-1929-revisited/docview/208971271/se-2.

Did Antitrust Laws & Emerging Modern Business Characteristics Affect Women's Economic & Entrepreneurial Aspirations in the Silent Film Industry?

According to study results released in January 2023 by the American Film Institute (AFI) in which 6,000 feature films released in the silent film era, it was discovered that “women represented a higher percentage of writers, directors and producers in the silent era than at any other time in the first century of American film-making.” 

Figure 1 shows where credits attributed to women working behind the camera were 10.9% in 1910-1930 versus 6.9% in 1931-1993. Feature films credits attributed to women screen/scenario writers and co-writers were 27.5% in 1910-1930 versus 12.2% in 1931-1993. Even literary sources that were written by women and adapted to the film were 19.6% in 1910-1930 versus 15.8% in 1931-1993.

        Figure 1, information from AFI study released January 2023.

The silent film industry as a whole was not at first targeted by the Sherman Antitrust Act after it was passed, even though Thomas Edison had created a monopoly on much of silent film technology by founding the Motion Picture Patents Company (MPPC) in 1908. The company subsequently folded in 1915 after it eventually lost a federal antitrust suit. 

Until this happened however, an article in the Saturday Evening Post stated that, “The East Coast became suffocating for non-Edison-affiliated film makers. Every turn they made in the industry was met with a lawsuit, stifling creativity and stalling innovation. The environment that Edison concocted led to independent film makers wanting to get far away from him and his monopoly. Hollywood seemed like the ideal destination.” 

Film production companies did become self-regulated through the Motion Picture Producers and Distributors of America (MPPDA) which evolved into today’s Motion Picture Association (MPA), until the film industry was brought under investigation in United States v. Paramount Pictures in 1948. The MPPDA was founded in 1922 and led by former Postmaster General William H. Hays. 

This information correlates to an article by Kolko that said Woodrow Wilson “expressed satisfaction that businessmen were beginning to reform themselves” in the time of Wilson’s vision coined the New Freedom.

Additionally, an article by Chandler notes that in the silent film era, the “modern business enterprise as having two basic characteristics: it contains a number of distinct operating units and it is managed by a hierarchy of full-time salaried executives.”

Silent film companies only half-mirrored Chandler’s description - there were several distinct operating units such as editing, costume, screenwriting, directing, acting, producing, camera crank, etc - BUT, film companies were managed by a few full-time executives, and were usually managed by investors, along with directors and producers, and there was no real hierarchy involved. 

Abreu explains that by the 1930s, and at the end of the silent film industry/era, the “studio system” took over as the business method employed. The studio system operated for about two decades, and involved Hollywood movie studios having control over all aspects of their film productions - including production, distribution, and exhibition. 

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Frances Marion, c. 1920. Photo courtesy The Criterion Collection.

Amid all of the new-found censorship antitrust legislation and modern business characteristics model, a pioneering woman in silent film named Frances Marion, navigated the business side of the industry to become arguably one of the longest employed, and best paid professionals in the field. 

The January 2023 study by AFI that is referenced above specifically highlights Frances Marion as having more film credits attributed to her scenario/screen writing than any other in the industry. By 1918, Frances Marion was making $50K/year, which is almost a million dollars a year, today ($996,159). The irony is that for a time at the beginning of her silent film career, Marion worked  for free to prove her skills as a writer.

By 1919, she received a letter from William Randolph Hearst offering her $2000 a week to write for his Cosmopolitan Studios in New York.

France Marion, silent film screenwriter. Photo courtesy In Their Own League.

According to the Beauchamps, who wrote and produced the Frances Marion documentary Without Lying Down: Frances Marion in Hollywood, “she wrote more than 200 movies and was the world's highest paid screenwriter - man or woman. Hollywood moguls competed for her stories…Marion became the first screenwriter to win two Oscars.”

In fact, an article by Petersen in Screenland Magazine from 1938, tells that Frances Marion “remained consistently the highest paid scenario writer in the world. The first to make big money in screenwriting, Frances Marion paved the way for the present income tax bracket for Hollywood writers who have her to thank for their surtaxes today.” 

Marion’s work as a screenwriter lasted through the beginnings of two film industries - silent and the “talkies.” She not only navigated a male-dominated field, she also became one of the most significant examples of how women with diverse capabilities behind the film camera came to run the early entertainment industry.  

Antitrust laws came to the silent film industry through the breakup of the Edison trust, ending his hold on the technology used to create early films. Business enterprise models also reflected the structure of silent film companies in the Progressive Era, to a certain extent. Regardless, women were able to exercise their entrepreneurial sides and flourish economically in the now-extinct field.

Bibliography

Abreu, Rafael. “What is the Studio System?: Hollywood’s Studio Era Explained.” Studiobinder website. (Jan.1, 2023). https://www.studiobinder.com/blog/what-is-the-studio-system- in-hollywood/. 

American Film Institute (AFI). “AFI Releases Landmark Study about the Contributions of Women to Early Cinema.” AFI Catalog website. (January 2023). https://aficatalog.afi.com/wtta-silent-era/#credits.

Beauchamp, Terry and Carrie Beauchamp. “Without Lying Down: Frances Marion in Hollywood.” Directed by Brigit Terry (2000). Video: Chaise Lounge Productions, LLC and UCLA Film Archive. https://milestone.vhx.tv/products/without-lying-down- frances-marion-in-hollywood. 

Chandler Jr., Alfred D. “Chapter 2: Scale, Scope, and Organizational Capabilities.” In Scale and Scope: The Dynamics of Capatilism. Cambridge, MA: Harvard University Press, (1990): 14-46. Accessed February 6, 2024. ProQuest Ebook Central.

Kolko, Gabriel. “Chapter Ten: The Triumph of Political Capitalism, The Federal Trade Commission and Trust Legislation.” In the Triumph of Conservatism. New York, NY: Free Press (1977). https://search.ebscohost.com/login.aspx?direct=true&db=nlebk& AN=1963172&site=ehost-live&scope=site.

National Coalition Against Censorship. “A Brief History of Film Censorship.” NCAC website (2023). https://ncac.org/resource/a-brief-history-of-film-censorship. 

Petersen, Elizabeth Benneche. “Great Women of Motion Pictures.” Screenland. New York, NY: Screenland Magazine, Inc. (1938): 54-55 & 77-78. Urn:oclc:record:1085107635. https://archive.org/details/screenland38unse/page/n275/mode/2up.