Financial History Issue 130 (Summer 2019) | Page 19
1921? The beginning of the Roaring
Twenties? What could have happened to
cause such a drop? And what has allowed
so many of us to ignore those 1921 events?
The answer to that last question, hinted
at earlier, is that the downturn in prices
and economic activity in 1921 was sharp
but brief—very brief by modern stan-
dards. Given that such downturns occur
with frustrating regularity, a look back at
the details surrounding the 1921 deflation/
depression might be instructive.
Let us then focus on the year 1921, and
let us not confine ourselves to platitudi-
nous, macroeconomic generalities devoid
of detail. Let us consider, instead, “all
things both great and small.”
The Minnesota Mining and Manufactur-
ing Company, now known the world over as
3M, was a small, fledgling sandpaper maker
in 1921. The company name was a little
presumptuous: there were plenty of other,
larger mining and manufacturing concerns
in the state (although few did both), and
sandpaper was not the most important of
manufactured goods. The process for mak-
ing sandpaper, however—straining rock
granules of a required hardness by diam-
eter, sprinkling them onto a soft base coat-
ing, then sizing, drying and curing—was the
sort of process that might be extended to
the production of other products.
The 3M we know today as an American
industrial behemoth, a mainstay of the
Dow Jones Industrial Average, had been
an even smaller, money-losing outfit when
World War I began in 1914. The onset
of war didn’t help matters: the conflict
caused great economic as well as political
uncertainty, and stock markets around
the world closed down for months for
fear of panic selling. After the initial shots
were fired, however, and the belligerents
put their economies on a war footing, it
became clear that demand for industrial
goods of all kinds would increase, and that
inflation of the currencies of the warring
countries would result. The United States
did not initially join the fray, but Ameri-
can prices drifted upward along with those
of the warring countries.
Inflation is the industrialist’s best
friend, at least when it is just beginning
or kept from spiraling out of control.
Raw material inventory acquired at low
prices is gradually transformed into final
product that can be sold months later at
higher prices due to the general increase
in all prices that characterizes a currency
inflation. Operating margins almost can’t
help but improve.
Little 3M would benefit mightily from
this combination of war spending and
inflation. Its sales totaled a mere $263,000
in 1914, and its expenses easily exceeded
that figure. By August 1916, however, the
company president could tell the Board
that, “Business has more than doubled
in the last two years,” adding “we’ll have
enough left over to pay a dividend.”
Sandpaper was perhaps a prosaic item,
but because it was used in automobile
production and repair, it was in high
demand nonetheless. American-made
military vehicles were being shipped to
Europe even before America entered the
war, and civilian automobile sales grew by
leaps and bounds following the armistice
in November 1918. Automobile produc-
tion doubled in 1919 from 1918 levels.
This growth in the automobile business
combined with the war-induced inflation
to cause 3M company sales for 1919 to
ring in at $1.4 million, a figure exceeding
expenses by a whopping $440,000. Profits
in 1919 were greater than total sales only
five years before.
It was as the 3M accounting department
was tallying up these surprising figures
that economic conditions began to turn.
The culprit behind the turn was interest
rates. The Federal Reserve Bank, look-
ing to curb inflation-fueled borrowing,
increased the lending rate it charged its
member banks from 4.75% to 6% on Janu-
ary 21, 1920, and from there to an almost
punitive 7% rate on June 1.
This set the stage for a massive de-
leveraging. Banks sought to cut back their
lending in order to reduce their high-
interest borrowing, and the rout was on.
Automobile sales, then as now dependent
on financing, dropped like a rock. From
levels of roughly 50,000 per month in
early 1920, sales of General Motors vehi-
cles declined to 13,000 by November, and
to less than 6,200 in January 1921. General
Motors continued to ramp up production
until the end of the year, however, which
left it with a mountain of inventory, fin-
ished and unfinished, when production
was finally curtailed in late 1920.
The effect on a small, automobile-ori-
ented enterprise like Minnesota Mining
and Manufacturing was huge. As auto
sales dropped, demand for their prod-
uct sagged. The beneficial effect that the
general inflation of 1914–1919 had on
company margins now began running
in reverse. Inventory generated at boom
prices had to be marked down signifi-
cantly in order for it to move at all, and the
downward effect on revenue and margins
was thus compounded. Company lead-
ers must have looked at the situation and
wondered if the inflation-aided prosperity
of 1919 would be the high-water mark of
company fortunes.
By the early months of 1921, things
had reached a critical juncture. With
demand dwindling for a product that was
declining in price, company management
faced a stark choice: reduce workers or
reduce wages. Sandpaper production had
increased markedly in the years leading
up to the break, and it was clear that the
skills their work force had developed were
responsible for this improved productivity.
It didn’t seem the brightest idea to lay off a
work force that had developed such skills.
The choice was made easier by the
simple realization that prices of other
goods, the various necessities of life,
were also falling through the floor. Crop
prices had declined by more than half in
the last six months of 1920, and grocery
prices followed. One dramatic example,
made worse by inflation-fueled lending
to Cuban sugar planters, was the price of
sugar: from a per pound high of 22 cents
in early 1920, sugar prices declined by over
90%, to two cents in 1921.
Incoming President Warren Harding
acknowledged the rout. In his inaugural
speech on March 4, 1921, he commiserated
with the nation’s workers and business-
men. “Our people must give and take,” he
said, acknowledging the slings and arrows
they had suffered. “Perhaps we shall never
know the old level of wages again,” he
speculated, concluding that, “We must
face a condition of grim reality, charge off
our losses and start afresh. It is the oldest
lesson of civilization.”
The management of Minnesota Min-
ing spelled out the decision they made
later that month in company bulletins
#71 and #72. “Owing to a change of busi-
ness conditions,” the bulletins announced,
hourly pay would have to be cut across all
pay grades. Such grades were arranged
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