The Dust Bowl (1931-1939) extended from southern Kansas to northern Texas, but was centered in the Oklahoma panhandle. This is largely prairie whose native shortgrass once supported innumerable bison. A characteristic of shortgrass is that it grows easily in areas where rainfall is as little as 10 inches per year. You know you’re looking at a problem when shortgrass can’t germinate.

It was routine, back in the day, for Congress to legislatively create a large territory with the idea that it would eventually become admitted to the Union as a State. That’s how Oklahoma was established – the U.S. Congress carved it from Indian Territory. The first Oklahoma land opening came in 1889, when a choice portion of Indian land was opened to White settlement. Subdivision accelerated as crossroads evolved into trading posts and trading posts grew into villages. Eighteen years after the first land opening, on Nov. 16th, 1907, the Oklahoma Territory was accepted into the Union as a State.

Labor intensive farms were still serviced largely by moldboard plows behind a mule. But in the late 1920s – about the same time the Great Depression started – the El Nino effect off the California coast (warmer than normal ocean surface temperatures) brought higher than normal rainfall to much of Oklahoma. This meant that (a) a greater variety of produce could be cultivated (b) in larger quantities than ever before. It was a bumper time, and the expectation was that it would continue. Under these conditions it appeared reasonable to everyone concerned (farmers, dealers, and bankers) for the farmers to replace their mule with a tractor bought from the dealer on credit provided by the local bank. 

Confident of a bright future, Oklahoma farmers went deeply into debt for the mechanized aides that would service ever more abundant harvests. And then things changed. El Nino became La Nina (cooler than normal ocean surface). At first rainfall dropped to below 10 inches. Then the rains just . . . stopped. An eight year drought started in 1931. At one point there was no rain for four years.

Shortgrass wilted. Crops didn’t germinate. The banker-man was seen to visit area farms.

But the tractor was still in the shed. Why not plow a little deeper, just a little more, down to where the soil was still damp, and maybe in that way urge at least a token crop?

The result of all those dryland farmers crank-starting their tractors following the last frost was that the fields were turned and damper soil revealed, but to no lasting advantage. Under that Oklahoma sun, the soil’s residual dampness evaporated before one’s eyes. If you squinted just right you could see the humidity rising before it disappeared. And then, as the soil warmed, the winds of the Great Plains began and never stopped. The topsoil, the economically useful portion of the ground, blew away in the form of dust storms. Some storms were thick enough to suffocate both farmers and their animals. Newspapers started calling them “black blizzards”. In 1932, a single storm blew a 200-mile-wide dirt cloud off the ground, the first of 14 that year. In 1934 there were 110 black blizzards. Eventually, over 100 million acres of deeply plowed farmland lost its topsoil. 

Some primary effects of the dust bowl were failed farms (no rain), busted banks (no loan repayments), and skeletal children (insufficient food). 

There were also secondary effects, such as large population shifts as farmers struggled to reach California, where it was rumored to still rain. By 1940, estimates were that 2.5 million people had left the Dust Bowl states.

There was some overlap with what was happening in New York, but few people in Oklahoma were talking about the financial Depression during the 1930s. The Okies obsessed over the drought and its consequences: the repossessed farms, dry cows, stunted children and silent wives. In New York, the conversation primarily revolved around financials: stocks, bonds, and deeds. In the 1920s, the Dust Bowl of the Great Plains was a near-analog of the Depression in New York. The specific concerns were different, but there was remarkable similarity of consequences, among which were at least three secondary effect knock-ons:

Failed banks:  During the decade of the 1930s banks failed from Oklahoma to New York for the same reason: not enough people were repaying their loans. Speculators who had borrowed money to buy stocks before the crash were unable to repay their debts after the crash. Dust Bowl farmers couldn’t raise enough crops to pay the farm mortgage.

Loss of farm production in Oklahoma was exacerbated due to local banks (and back then almost all banking was local) being unable or unwilling to lend or renew their loans. The effect was similar to the closing of New York banks that resulted in manufacturers going out of business. In each case the local banks were unable or unwilling to provide the necessary working capital. Businesses – and farming was as much a business in Oklahoma as the garment industry used to be in New York – closed down. Then the population shifts occurred. When the lights went off, the dirt farmers moved to Stockton. The bankers moved to Miami.

Permanent Loss of Capital:  Investors, with good reason, fear permanent loss of capital. Market fluctuations are acceptable, because that means depressed prices have a chance of recovery. In general, investment portfolios (stocks, bonds, deeds) can be designed to reduce (but never to completely expunge) the adverse effects of the customary market cycle. There is, however, at least one classic way to shift what may have once been a temporary investment loss into a permanent loss of capital: debt.

Farmers who celebrate a good year by financing a tractor have an obligation that will have to be repaid in the bad years that follow. If the encumbered tractor is repossessed, that will represent a permanent loss of capital.

Immediately prior to the Depression, stocks were in high demand, as were Oklahoma farms. Almost any sum would be paid for a stock with a good story or a farm still fragrant with the petrichor of a good rain. After the crash those stocks, those farms, were worth only quarters on the dollar. Maybe not even that. It wasn’t just farms, it was also Wall Street. In 1930 alone 20,000 companies went bankrupt. Just like the farmer’s tractor, those failed industrial companies caused their investors a permanent loss of capital.

Inflation: When goods or services remain unchanged but nevertheless cost more, it’s called inflation. Inflation is the economic norm. It is to (nearly) everybody’s interest to live in a time of temperate increases in labor and material. For example, a $100 item whose retail price inflates at 2% monthly will cost $126 a year hence. That potentially stimulates consumer demand: “Buy now. If we wait, it’ll only cost more!” With appropriate inflation, the unemployment rate is modest. 

Inflation, whether mild or rabid, makes it possible for an investor to pay off his loan with devalued dollars. As a hypothetical, imagine an investor finds a desirable apartment building being offered for $1 million. He manages to borrow the entire purchase price from his maiden aunt. He is her favorite nephew so she requires no interest, but she wants the loan repaid in five years.  

Imagine that inflation is recorded at 3% annually over that period. At the end of those 60 months, the value of the aunt’s million-dollar loan has been reduced to an inflation adjusted (constant dollar) value of roughly $860,000. The maiden aunt has experienced a 14% loss in purchasing power. Inflation hurts maiden aunts who don’t charge interest.

On the other hand, if her nephew sells the apartment building at the end of those five years for the inflation adjusted value of the original $1,000,000 purchase price (i.e., $1,160,000) his capital gains (net of costs) would be $160,000 on an original investment of . . . nothing. He had none of his own money invested. Clearly, inflation tends to benefit borrowers. 

Lenders are not blind to that and that’s why even a hint of inflation raises interest rates.

Deflation: While modest inflation supports high employment rates, deflation, in any significant degree, crushes jobs. In a deflationary period, the longer the customer waits, the less the item will cost: a $126 item that depreciates 2% a month will cost only $99 a year from now. “Buy later. If we wait, the cost will come down!” When enough people are thinking that way, sales collapse and layoffs follow. The layoffs initiate another round of collapsing sales, followed by even more layoffs. It becomes a race to the bottom.

Continued next month . . .

 

This article is for informational purposes only and is not intended as professional advice. Nothing in this article is presented as investment guidance. For specific circumstances, please contact an appropriately licensed professional. Klarise Yahya is a Commercial Mortgage Broker specializing in difficult-to-place mortgages for any kind of property. If you are thinking of refinancing or purchasing real estate Klarise Yahya can help. For a complimentary mortgage analysis, please call her at (818) 414-7830 or email [email protected].