"The Great Depression: A Diary"

Diaries are always so serious

Benjamin Roth's diary is a month-by-month account of one of the U.S.'s most socially and financially turbulent eras. The contagion began in the equity markets, as investors discovered assets they'd thought a bargain were worthless. As the economy cratered, unemployment spread; mortgages went into default; millions lost their homes¹. Banks failed – and in many cases, illegal activity and insider kickbacks gave them the final push over the edge. Radicalism was on the rise. Some thought they were witnessing the death of capitalism.

This book's subject is the Great Depression, of course, but doesn't it sound eerily similar to 2007-2009? That's ultimately why I picked up "The Great Depression: A Diary": to see what lessons the past holds for the present.

For the first time in my personal business life I am witnessing a major financial crisis. I am anxious to learn the lessons of this depression. To the man past middle life it spells tragedy and disaster but to those of us in the middle thirties it may be a great school of experience out of which some worthwhile lesson might be salvaged.

—Benjamin Roth, June 5, 1931

Benjamin Roth was a lawyer in Youngstown, Ohio through the Depression years. He chronicles the closings and re-openings and closings of Youngstown's steel mills, the many bank runs and panics, the inexorable slide from gold-backed currency to a barter system, the shifting political landscape, the tribulations of neighbors who had lost everything, and through it all, the fortunes of his law practice².

I picked out a few key lessons from his diary. First, many people made predictions about the future, based on some combination of their political views and the year's zeitgeist and what they thought would generate publicity. Perhaps it was that the economy had finally reached the bottom, or that the worst was yet to come, or that real estate was now so undervalued that it was a sure thing. Maybe it was that if FDR were elected Communists would take over the country, or maybe it was that the government would cause runaway inflation, or that the New Deal would restore the previous decade's prosperity.

Here's the interesting part: Roth reviewed his diary years later and added margin notes revealing how those predictions turned out. They were all wrong.

The moral? No one knows the future. Sometimes people get lucky, but never count on that.

Next lesson: as the Depression continued through 1932 and 1933, a few speculators thought the stock and real estate markets had bottomed out and bought on leverage, then lost their shirts. Before long, people thought it would never end. Most were unprepared for the rapid turnaround in the second half of 1933, but by 1935 and 1936, people were confident that the good times were back. They bought new clothes and new cars and new houses, going even further into debt to finance those purchases. In 1937, the economy tanked again and millions were caught flat-footed.

The moral? Don't overreact. The prudent course is to save during the good times to ride out the bad.

Finally: Roth's neighbors told him variants of the same story again and again. During the 1920s, they passed up 5% or even 10% rates of return to take out second mortgages and buy on margin stocks and properties that promised returns of 20% per year, or even more. When the markets tumbled, not only did the 20% return evaporate: the underlying assets turned out to be worthless. One man, in tears, told Roth that if he'd only put his savings into treasury bonds his family would have been financially secure for life.

The moral? Don't be greedy. Know when to say "Enough!"

My highly subjective rating: "The Great Depression: A Diary" is a fascinating first-person account of life during an economic calamity, as it provides only the historical context Benjamin Roth himself had at the time. Roth's thoughts and fears provide something invaluable: perspective. I suppose how much of it will stick remains to be seen.


1 My understanding is that you need to combine foreclosures (homeowners) and evictions (renters) to get into the millions, but it's my blog and I have dramatic license, right? (back)

2 Roth notes several times that family lawyers like himself are hurting, but foreclosure and bankruptcy practices boomed for the whole decade. Sounds about right. (back)