In June 1931, Leo Baekeland wrote in his diary on the effects of the Great Depression on his business, “Prospects in business look gloomy everywhere. But I fail to see any evidence that any of our departments has made any reduction in its expenses”. What many may not know is that Leo Baekeland, was the inventor of the first commercial plastic, a material we all use in our everyday lives. And while he was a devoted scientist, he was also a devout diary writer. His diaries spanned from 1907 to 1942, tracking major world events in personal detail, including the Great Depression.
Baekeland like other businessmen of the 1930’s felt the economic strains of the Great Depression. In his diaries he stated early after the market crash that his business was on stable ground because they pulled their money before the fall, but still his plastic company does not go unscathed. His business suffered the effects that caused the Great Depression as explained by American economist Irving Fishers debt-deflation theory.
After the 1929 stock market crash, Fisher wrote his book based on the debt-deflation theory he developed. Based on his theory, Irving suggested how economic recessions happen and in what ways a personal and national debts can affect the prices of goods. More to the point, his theory suggests that as prices drop across many consumer products and services constantly fall, levels of debt will increase and for period-of-time and there will be economic volatility resulting in a recession.
While Fisher’s theory proved a solid explanation of the causes that contributed to the Great Depression, his debt-deflation theory went mostly unnoticed until the 1980’s. Since then, many recent economists now use Fisher’s models to depict detailed analysis of large-scale economic cycles and financial volatility.
Leo Baekeland in Lab
Baekeland’s writings support Fisher’s theory as stated in his 1931 diary, “I have sold all my stocks purchased since 1929 and of which the market value has dropt [sic] lower since the further depression; so as to know the benefit of establishing my losses and their deduction from my income Taxes 1931.” Like most of the American businesses, Baekeland’s General Bakelite Company suffered saw serious losses during the Great Depression as a result of prior debts.
Fisher went into detail explaining that there were possibly many causes of the depression but one of the most common causes was due to the numerous people taking loans for the prospect of investing the funds for the purpose of reaping large rewards quickly. This was not restricted to only the businesses community or individuals, but everyone. With the development of the latest technologies, advanced businesses, new resources and territories with new market opportunities, investors saw huge profits to be gained.
Fisher further explained that with all the possibilities and effortless ability to get cash loans led to over-borrowing. Investors took loans at 6% annual interest believing they would make 100% return on their investments in short terms; many speculated with loaned money in this manner, accumulating large amounts of debt. Fisher believes this was the primary cause of the Great Depression.
Fisher also compares past depressions as examples to support his debt-deflation theory. The first example of the 1837 depression when investors incurred large amounts of debt with investment in land prospects developing in the southwest and western United States in real estate. Leading up to the 1837 depression, investors also invested heavily in canal building and infrastructure including steamships and turnpikes to open the eastern United States to the western side of the Appalachian Mountains.
In the south during this same period, investment in cotton mills ran rampant, with most mills failing. Out of several dozen antebellum textile mills in South Carolina, only the Batesville and Graniteville mills turned a profit. Most failed due to raising sufficient capital, unskilled labor and lack of proper management. It would not be until 1876 that southern investors became successful in the textile industry.
Fisher also looks to the 1873 crisis stating that the primary reasons for the depression were the overinvestment in railroads and western farms after the passing of the Homestead Act. As well, Fisher contends that over indebtedness led to the 1893 depression because of issues specie. The amount of gold in circulation was not sufficient and not enough silver was put into circulation. Fisher’s states that the common denominator in the 1893 depression was deflation.
He also explains leading up to the Great Depression there was a psychological perspective that played into the debt-deflation cause that can be depicted in several phases. The first is the enticement of large financial future rewards. The second phase is the selling high after buying low and reaping capital gains quickly mentality. The third phase is that during the 1920’s, reaping great rewards was the rage of the time; everyone was doing it and getting rich. Lastly, Fisher says there was a mixture of fraud and a naïve public who believed in the get rich trend.
Based on Fisher’s examples of the debt deflation theory, it is easy to see his theory as a sound argument as to the cause of the Great Depression. Investors, whether individual or collective groups, overextended their debt holdings to the point that they could not cover if the time came to pay, and the time did come. Once the chickens came to roost, whether responsible or not, all businesses including Leo Baekeland’s suffered financially as a result of the Great Depression.
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