No. of Recommendations: 5
On a hot, quiet, un-airconditioned July afternoon in 1924, a small-town Nebraska grocer plunked down $286 in gold-backed currency…for shares of a borax mining and production concern over a thousand miles away.
A hundred years later, his great-grandson found the stock certificate in the basement and wondered,
What could the old guy have possibly been thinking?---------
Great-grandpa John had been born in downstate Illinois in 1872. At nineteen, he went to work for the Burlington & Missouri River Railroad, starting as a lineman and ultimately becoming a station agent five hundred miles from his home town (all while dabbling in his off hours with fair success in everything from lumberyards to land speculation). After a half-dozen or so transfers around the Midwest during his nineteen years with B&M, he left the railroad for good and walked down the street sometime around 1910 as the proprietor of first a ladies’ clothing store and later a grocery business in Crossroads, Rural County, Nebraska.
By July 1924, John had been married for 28 years, and had three children:
• A son, age 26, who had served his country in WWI, and returned home…for a while. After a couple of years, he followed the popular song (1) and left Crossroads in favor of selling cars in New York state.
• A daughter, age 22, who had married the boy-next-door two years previously. While that young couple was still in town, the writing was nonetheless on the wall: her husband’s father’s Mom & Pop household goods store (down the street from his own grocery) wasn’t doing so well, and this young couple were destined to permanently leave Nebraska for Los Angeles two years later, in September 1926. His parents sold everything and followed them a year later.
• Another daughter, age 14, was still at home.
That was his situation when he plunked down two hundred and eighty-six of his hard-earned dollars (inflation-adjusted to around $5,450) for a borax processing company a thousand miles away .
A century later, I examined the engraved and embossed stock certificate and wondered what advice I would have given in mid-1924 to fifty-two-year-old John: no social security, no bank deposit insurance, getting old, the kids leaving, and his adopted home town of Crossroads obviously starting to wear out, dry up, go broke in a world where there were almost no rules regarding retail investing, insider trading, and honest, timely public accounting. While the current equivalent of five thousand or so dollars wasn’t going to move the needle in any appreciable way, nonetheless
something sensible should have been done with it.
What conceptual considerations applied?
The small-town Nebraska economy was all local, and virtually without social safety nets beyond the neighborhood church. Local farms supported local merchants, and vice-versa. Banks were uninsured and typically standalone, holding local farm mortgages as their principal assets. Farm loans were generally interest-only, and rolled over every three to five years. The railroads still gouged for shipping, but the ICC (now theoretically in place for years) was finally going to get on top of that any time now, hopefully.
Broadly speaking, this model had worked since the development of the railroad: move a couple of degrees westward each generation; plow, plant, and build; repeat. (Well, at least until you got to a hundred degrees west longitude, beyond which attempts at dryland farming exceeded the western boundary of reliable airborne Gulf of Mexico moisture. His generation had run out the thread, Crossroads, Nebraska literally being at 99 degrees W longitude.)
Nonetheless, the land-will-provide model would certainly been thought durable when crop prices boomed during the Great War, and even for a period after the war when the prevailing wisdom was that European agriculture would take many years to recover. Crop prices kept going up! and land prices with them!
…Never trust a macro forecast.
In 1923 his son-in-law’s father had put a notice in the local paper that his household goods store would no longer extend credit.
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So, back to Grandpa John’s $286 in July 1924 (which he may well have pulled from what by then was an obviously at-risk local bank). What to do?
If he had been aged 25-35 with an entrepreneurial bent, developing property in southern California would have made sense, using no special knowledge that he wouldn't have had easily available in the local daily newspaper, library, or everyday gossip. Heck, at that point he could have waited a couple of years to be able to enlist Los Angeles-area scouting help from his son-in-law. The LA aqueduct had opened in 1913. Perhaps a few acres around the edges: Pasadena, Pomona, Eagle Rock, Anaheim. A young man could buy undeveloped land, build a house or apartment building, live cheap, rent or sell, roll over profits into a larger project, quit after the 3rd or fourth doubling of the investment. Dicey but doable with the economic tailwind.
But he wasn’t an entrepreneurial 25 year-old. He was a fifty-two year-old merchant with a wife and teen daughter in the house, and what he wanted was for his capital to passively grow. Then and now, simply buying and sitting on raw land hoping the price will go up (and that someone will buy when you're ready to sell) is very far from a sure thing.
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So: maybe equities?
My first thought was Ford, as he would have already seen in his lifetime the abrupt change from horse to auto. In 1925, the Model T had been out for seventeen years, soon to be succeeded by the Model A – reminiscent of Apple during the smartphone era, or the development of the internet. Buy a couple of hundred bucks of Ford, Grandpa! It’s right in front of you!
Except I had conveniently forgotten Ford was privately held until 1956 (3). Oops.
Speaking of mechanization: maybe John Deere? Nope, privately held until 1933. Oops.
Well, he was a grocer and must have been well-aware of General Foods (known as Postum from its 1922 public listing (4) until changing its name in 1929 when Clarence Birdseye sold out to them.)
…except that in July 1925 Postum was in the middle of a seven-year boom that had run it up to around $100/share. John’s $286 – presumably largely originating in a penny-a-can margin on soup – wasn’t going to let him buy an invitation to that party.
But there were a few other publicly-listed corporations that he would have known about and could have invested in: US Steel, Coca-Cola, AT&T, General Motors, Standard Oil, RCA.
In one respect, that's easy for me to say - what would have dissuaded him from putting the same amount into Nehi Soda, Hudson Automotive, or one of the many doomed railroads? But I like to think that even then USS, Standard Oil, AT&T would have been the more sensible choices with the easily obtainable knowledge at hand.
Diversity? The closest you could get to a mutual fund in 1925 was a closed-end fund. Even if he could have bought into one of these opaque, dodgy-bookkeeping vehicles with the puny amount he had to invest, prior to the 1933 Securities Act I think that no sensible grocer would have come close to doing this. So, single issues it would have to be.
Getting back to General Motors, Coca-Cola, Standard Oil: say he’d invested eighty bucks apiece in three of these.
Well, not so fast; the rules were different then. What with high commissions and round lot trading, he might not have been able to afford even one of these choices. (What I’m saying is: a hypothetical $7 stock could be purchased only in 100 share “round lots”. Add a 5% commission, and it’s a minimum of seven hundred and thirty-five dollars to invest in a single one of those choices when all he had was $286. No wonder the leverage boom started around then.) But, if he had managed to avoid temptation and invest only in an unleveraged, cash account: each of these ultimately grew around 5%/year for the fifteen years between 1924 and the outbreak of WWII, and paid around a 5% dividend, too. (Although that annual 5% was far from a straight line, and it would have taken an iron constitution to not only insist on a cash account in the first place -- when everyone else was on margin -- but also to simply hold on and not sell for the middle five of those fifteen years.)
But none of that counts. With only $286, he wasn’t invited to play in that sandbox, either.
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Or, he could have bought US Bonds i.e. long-term Treasuries. Those yields dropped steadily from around 4% to around 2% in the fifteen years from 1924 (5). As inflation was actually negative (i.e. deflation) 1924-1939, his real earnings on US Govt obligations would have been 3-5%/year -- but without the capital appreciation he would have had with stocks, so less than half of the overall yield.
Sure, I can hear 1924 John thinking,
let’s lend it to the boys in Washington. We can see from here how well they’re managing things for us.------
Or, he could have used a method from time immemorial: loan it out privately. One choice would have been to fund one (or several) young person’s embarking on business for himself, after completion of relevant training in a trade. That’s the approach Benjamin Franklin used for the trust he endowed upon his death:
“The Trustees shall…let out the sum upon interest, at five percent, per annum, to such young married artificers, under the age of twenty-five years, as have served an apprenticeship in the said town, and faithfully fulfilled the duties required in their indentures, so as to obtain a good moral character form at least two respectable citizens, who are willing to become their sureties, in a bonk with the applicants, for the repayment of the moneys so lent, with interest, according to the terms hereinafter prescribed…”…with such sums of fifteen to fifty pounds to any one person (around $1,500 to $5,000 in current dollars, or from about $80 - $260 in 1925 dollars)
Or…maybe not. As I said above, John’s entire reference economy was local. The whole town was drying up, so any monies invested locally could be predicted to not do well. And good luck vetting some kid in far-off Omaha, much less Chicago or New York. Perhaps you’d better stick with Treasuries.
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Or, he could have just hung onto the cash. FDR would compel him to convert gold into paper money in 1933, but he'd still have the same or slightly better buying power (due to the deflation) in 1939, when he was seventyish. (Assuming he found a safe place to hide the gold…this being a small town, soon enough it would be common knowledge that he’d withdrawn his savings.)
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In other words, apart from a steady, low yield on Treasuries, or else burying a bag of fourteen $20 gold pieces somewhere out back, Grandpa John seemed pretty much stuck.
In that light, paying down hard, gold-backed cash for shares in a Nevada borax concern might not have been prudent, but perhaps a hundred years ago on a stiflingly hot, too-quiet July afternoon it seemed like the best-available choice for a fifty-two-year-old homeowner with a wife and teen daughter at home, spending his days living a life of quiet desperation, feeling increasingly checkmated while watching both his business and his town dry up around him.
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Epilogue:
• Five years later, the borax company had ceased operations, and his stock was formally worthless (6).
• A year after that, the 1930 US census listed him as Unemployed, living his in daughter and son-in-law’s small house in Los Angeles. His wife and seventeen-year-old daughter were still in Nebraska, waiting to be sent for. They remained there until at least 1935.
• In the 1940 census he was again a ‘grocer’ (I think a grocery clerk) in Los Angeles, now reunited with his family.
• He passed in 1947, age 74, an indigent widower again living with his daughter and her family.
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Footnotes:
1)
https://youtu.be/zquvLQRpVyI?si=HxaRtYA_46Fu7E9u2) I looked in to this corporation, and in Grandpa John’s defense, it was a reasonable company. The principal of the eponymous firm had taken out some relevant patents
https://patents.google.com/?inventor=George+B+Burn... and there existed a development site and working prototypes. The company was ultimately out-competed, possibly with some patent infringement along the way. So a risky investment, but not an overt scam either
3) When Ford was largely owned by a very rich heir
4) When Postum was largely owned by a very rich heiress, Marjorie Meriweather Post, who at the time was building an ostentatious, rather tacky resort in Palm Beach, FL. Mar-A-Go-Go, or something…later destined to be sold to an ostentatious, rather tacky New York developer
5)
https://fred.stlouisfed.org/series/M1333AUSM156NNB...6) The bones remained picked over by patent and anticompetitive litigation until 1948 or so, probably explaining why the stock certificate was passed down – just in case
