Starting Afresh

The Financial Counselor is designed to help readers to a better understanding of the general business conditions which affect their investments. It is obviously impossible to give personal advice, either in these columns or by letter


THE longer this depression lasts, the fewer are the predictions as to when it will end, for it has now become quite obvious that it is a far-reaching affair, and that no one knows how much longer it will continue. This being true, it is perhaps just as well that those erstwhile forecasts of recovery, which by implication raised false hopes of the immediate return of previous prosperity, have ceased, for they only served to divert attention from the more important job of dealing with conditions which actually confront us.

It is perfectly natural to look back wistfully upon the prosperous times so recently gone, and to wish for their prompt return, but this attitude is not unlike wishing for the return of one’s youth, and is equally unprofitable. In the first place, it is not at all likely that this depression will end suddenly; in the second place, even assuming its sudden end, it is not reasonable to expect a resumption of the previous order of things, since most of the conditions which produced it have ceased. There cannot occur even a start toward the resumption of the recent levels of wages, prices, and profits without a foundation similar to that which started them before. While in the distant future new circumstances will doubtless arise to lift these levels to new heights, such new conditions will not be a carry-over from the peak of the past; rather, they will develop out of the groundwork that is now being laid by those who realize that a fresh start has become unavoidable.

Prosperity, when it does return, will not come to us as a gift, like manna from heaven. It cannot be legislated into being, although a constructive governmental programme will make it more certain. It cannot be conjured up by economic tinkering, so long as two and two make four. It must be built by each individual separately, on the only basis capable either of creating or of maintaining it, which is hard work, and prudent spending and saving, reënforced by the passing of time. This element of time is essential—a fact too often forgotten in our economic thinking.

Depressions do not start suddenly, and cannot suddenly end, because the conditions which cause and end them are a long time in the making. Following the relatively mild business troubles of 1907, it took about fifteen years to set the stage for the era of prosperity which reached its height in 1928 and 1929, and there is not much use in counting upon a return engagement in full force soon. But it is worth remembering that the foundations laid after 1907 made possible steady progress over an extended period of years. This is the heartening fact to keep in mind as we set about putting our houses in order.

In this process it is the individual who holds the key, for general business prosperity must wait until he — and his number is legion — accepts conditions as they are, adjusts himself to them as quickly as he can, and, by harder work and grimmer determination, balances his budget with a surplus. It is the accumulation of millions of such small surpluses, giving to their creators increased confidence in the future, which will provide the initial impetus for the upward swing of the pendulum. General business will then respond, thus starting the new cycle of economic activity. Of course there is little solace in this for those who are willing to work but cannot get jobs. Fortunately, however, most people are gainfully employed, and their numbers are increasing. As the individuals in this group bring their financial affairs into balance and release their normal purchasing power, they will not only overcome their own troubles, but, by increasing the demand for goods and creating more and more jobs, they will also help to solve the problems of the rest.

Despite their hardships, these times are not without their compensations, financial and otherwise. For one thing, the cost of living has markedly declined, so that a reduction in earnings by as much as one third is in most cases fully offset by the lowered cost of necessities. Moreover, the pace of living has slackened, and millions have learned that the cost of entertainment has no necessary relation to its satisfaction. Home life, at its natural level, has not been so widespread in a generation, and the folly of trying to keep up with the Joneses has been largely abandoned, partly because it was silly anyway, and partly because there are not many Joneses left to pursue. There has also arisen a keener appreciation of t he value of thrift, and of the peace of mind which comes from simple living within one’s income, and there is a tendency to be more thoughtful of the future and the methods by which its security may be achieved.

None of these present characteristics is more marked, in contrast to those which prevailed a few years ago, than that which has to do with the investment of savings. In 1928 and 1929, a medium of investment which did not give promise of doubling one’s money promptly was considered tame by that vast army for whom the Stock Exchange seemed not unlike the kind fairy with a magic wand. But now that the Exchange has ceased to be so obliging (being compelled to await the revival of individual prosperity, which it reflects but cannot create), the demand for quick profits has been largely supplanled by a rigid insistence that savings shall be invested in channels where their original worth will at least be held intact. Thus an increasing number of people are coming once more to recognize the value of systematic savings which enjoy the fruits of compound interest. This ally has for a long time been much underrated. As a matter of fact, a return of 4 per cent in compound interest, sustained over a reasonable period of years, yields highly satisfactory results—results, indeed, which are rarely achieved by the average investor in securities. Since this statement may be disputed, let us look into it a little more closely. At 4 per cent interest, compounded annually, money will double itself in eighteen years, whereas, to achieve the same result in the same length of time, a return of per cent would be required in simple interest. The only certain thing about investments is that their return is in inverse proportion to their safety. Present conditions indicate that 4 per cent is the conservative standard, and, while 5 1/2 per cent does not suggest a reckless level, still it necessarily implies an increased risk. Moreover, at this higher rate, there must not occur either a day’s loss of interest or a dollar’s loss of principal, and such contingencies, over a period of years, are difficult to avoid. It is not without its significance that the great exponents of compound interest, the life insurance companies and the mutual savings banks, have stood as a bulwark through this storm, and are now receiving the homage to which their record clearly entitles them.

In a recent speech, Dr. Julius Klein was quoted as saying that most people, when this depression began, believed that a graph of its course would resemble the letter V; that later it seemed that the letter would be U; and that, as time continued to pass, many people acted as though letter undoubtedly were L! But already sheer age is beginning to count heavily against the depression, and these L people are in a distinct minority. They are vastly outnumbered by those who realize, even before any more letters are added, that the graph is probably spelling out the word ‘Vulnerable.’ These folk accept the warning. They have long since ceased to make futile comparisons with the past, and, with tighter belts, are looking and planning ahead with courage and faith.