New Venture Lab: Equipping Christian Entrepreneurs

Many economists are predicting that we are headed into another depression, perhaps even as bad as the Great Depression.  Given that, I recently commissioned an exhaustive investment research report on what happened during the Great Depression and specifically what products, services, companies and industries survived and even thrived.

As Christian entrpereneurs, we need to be students of history and apply that wisdom as we develop or tweak our value propositions for our customers.

Here is a brief synopsis of the research:

Causes of the Great Depression - The Great Depression was not caused by a single event, but by national and international circumstances, such as:

• Rising Fed Fund rates, which ultimately led to the stock market crash in October 1929.
• Speculative selling of dollars, which were accumulated by the investors after the 1929 stock market crash.
• Decrease in trade with other countries as a result of the Hawley-Smoot Tariff, set up in 1930 to help sustain American companies by charging a high import tax.
• Limited available capital for business, due to the continued rise in interest rates -- a step taken by the Fed to check the depreciation of the dollar.
• Restricted money supply from the Fed even during persistent deflation.
• Bank failure, caused by massive withdrawal of funds from banks.
• An overall reduction in purchasing, which led to a decrease in the workforce and high unemployment rates.

Facts and Figures - By 1933:

• GDP had been reduced by half, from $104 billion to 56 billion. The primary reason was falling prices (an annual deflation of 10%).
• Unemployment rates had risen from 3% to 25%; even almost 38% amongst non-farm workers.
• Wages had fallen by 25%.
• Housing construction had dropped by 80%.
• Wholesale prices had fallen 31%.
• Consumer prices had decreased by 24%.
• 10,763 of the 24,970 commercial banks in the United States had gone out of business.

Labor Force

• Total unemployment rose from 3.2% in 1929 to 25.2% in 1933 and then decreased to 17.2% in 1939 again.
• Farm employees experienced a more stable work environment during the Depression. Unemployment rates amongst non-farm employees in contrast amounted to almost 38% in 1933.

Earnings

• In the U.S. average annual earnings per FTE (full-time equivalent) decreased across all industries and could only reach 1929 levels in transportation and  communication & public utilities industries by 1939.
• By 1933, wages had fallen in every industry.  The construction industry was affected the worst, where wages had dropped by half.  Average wages in 1933 had fallen by 25% of 1929 levels.

Consumer Expenditure

• Changes in consumer spending played an important role in lengthening the Depression.
• The impact of the downturn in incomes and the stress placed on consumer credit markets had serious consequences for the industries.
• Disposable personal income declined by 26.1% from 1929 to 1933, from $229.5 billion to $169.6 billion. Total consumer credit fell 41 index points in the same period.
• The composition of consumer expenditure shifted as a cause of the Depression
• From 1929 to 1939, overall consumer spending decreased by $10.2 billion, from $77.4 to $67.2 billion. Consumer spending decreased the most in 1933, sinking to $31.5 billion compared to 1929 levels.
• Although households reduced their expenditure on every segment, reduction in spending was the least for the services segment. Expenditure in services dropped by 34% from $30.5 billion in 1929 to $20.2 billion in 1933.
• Spending on nondurable goods fell by 41%; durable goods expenditure  suffered the most and declined by 62% in the period from 1929 to 1933.
• When the  market bottomed-out in 1932, the contribution of the service sector to overall consumer expenditure was at its peak at 46%. Spending on durable goods reached its long-time low, comprising only 7% of the total consumer expenditure.

Prices

• Wholesale prices of all commodities experienced a dip in the years 1932 and 1933.
• By 1932, overall wholesale prices had dropped to 64.8% of 1926 levels.  Prices again increased from 1933 through 1937 only to fall in 1939 to 77.1% of 1926 levels.
• The farm product industry was affected severely in 1932 with a wholesale price decrease of more than 50% as compared to 1926 levels.

Industrial Production

• Industrial production in the U.S. declined by almost 47% annually from late 1929 to early 1933.
• Starting in the U.S., the Depression also affected production levels of other countries in Europe, Latin America and Asia.
• Great Britain fought low growth and recession during the late 1920s. The country did not fall into severe depression, however, until early 1930. The decline in industrial  production was nearly one-third that of the United States.
• France was affected especially in the early 1930s. The country experienced a short recovery in 1932 and 1933; however, industrial production and prices both fell substantially between 1933 and 1936.
• The downturn in Germany was experienced twice. First in early 1928 and then, after a short recovery, again in late 1929. German industrial production declined annually by 41.8% between 1929 and 1933.
• Latin American countries slipped into depression before the U.S. downturn. While some less developed countries experienced severe depressions, others, such as Argentina and  Brazil, experienced comparatively mild downturns.
• Japan was hit comparatively late, in early 1930, and experienced only 7% annual decline in industrial production.

Industry Sector Performance

• Among the sectors that drove losses in Corporate Profit before Tax (CPBT) during the Depression, manufacturing of durable goods showed the strongest ups and downs.  Average CPBT fell from a surplus of $25.7 billion in 1929 to a deficit of $13.3 billion in 1932. By 1937, profits had risen to $20.5 billion before declining again in 1938.
• In 1932, all sectors experienced losses.  Apart from manufacturing of durable goods, transportation , retail trade and automobile services were affected the most.
• Among the companies that did not suffer losses in CPBT, the communications sector was the least variable; while the manufacturing sector of nondurable goods was the most variable.
• Corporate Profits declined by $22.3 billion to $1 billion from 1929 to 1932 and quickly jumped up to $10.7 billion in the following year.  By 1939 they had almost reached 1929 levels again.
• The finance, insurance and real estate sector fell in initial years and had their biggest downturn in 1934 with CPBT of $2.36 billion.

National Income

• Between 1929 and 1932 national income had dropped by more than 50%.
• Manufacturing income had dropped by 70% and construction income had dropped by more than 80%. Government was the only industry that had grown over the period.
• Adjusted for the drop in prices, national income had fallen by 30-40%.

International Trade

• International trade and manufacturing rapidly diminished during the course of the Depression. Growth in world trade throughout the 1920s had vanished by 1932, when nominal world trade dropped to around one-third of 1929 levels.
• U.S. imports and exports had reached an estimated value of almost  $10 billion in 1929. By 1933, value had dropped by two thirds, to $3 billion.
• World import and export volume in industrialized nations decreased by about 30% from 1929 to 1932.
• By 1937, 1929 world trade levels had been reached again. Recovery was mostly  driven by a rebound in income. Income growth contributed to a 26% increase, and the easing of trade barriers to a 7% raise in world trade between 1932 and 1937.

Tariffs

• Income, tariffs and nontariff barriers had a great impact on world trade during the Depression; 41% of the collapse in world trade from 1929 to 1932 was due to the rise of various trade barriers, and 59% as a result of falling nominal income.
• In the course of the Smoot-Hawley Tariff Act, U.S. tariffs were raised to 44% in June 1930, the highest in the world at that time.
• Due to higher trade barriers, trade volume contracted by about 6% from 1930 to 1932, and declined further about 3% from 1933 to 1935-1936, when nontariff barriers were raised to almost every European country.
• In 1932, tariffs were raised 20% in the United Kingdom and preferential tariffs were set up throughout the British Empire. In an attempt to stay solvent, Germany raised its tariffs to 100%.
• In 1937, many barriers were removed which contributed to an increase of almost 5% in world trade.
• In the 1930s, the international economy had been broken up into trading blocs determined by political allies and the currency used for trade. Trade between different blocs was limited. Between 1920 and 1939, only one-third of world trade was done outside a bloc.

Imports and Exports

• Total foreign trade in the United States was worth $10.2 billion in 1929. After the Crash trade value dropped around 24% annually for the next three years. In 1933, trade only declined by 10% compared with 1932 levels.
• Compared to 1929 levels, foreign trade in the U.S. had fallen by more than 60% in 1933.
• In 1929, the value of total U.S. imports had reached $4.75 billion.
• During the Depression, imports decreased by two thirds in the following four years, accounting  for only $1.7 billion at the end of 1933.
• Merchandise and Silver imports fell to its all-time low in 1932, recovering after that point. Silver imports had reached 1929 levels again by1933.
• Gold imports almost doubled from $291 million in 1929 to $612 million in 1931. By 1933, imports dropped to lower than 1929 levels to $193 million.
• From 1929 to 1933, value of total U.S. exports declined by more than 60%.
• Merchandise exports dipped in 1932 to a value of  only $1.6 billion, having had a value of  $5.2 billion in 1929.
• By 1933, merchandise exports had started to recover,  but were still valued at only  $1.7 billion.
• Gold exports had increased almost sevenfold  up to $800 million by 1932. In 1933, gold exports were cut back by more than half, to $367 million.