Small Town Decline: 1920s & the Rise of Chain Stores

Money MultiplierOne of the things I enjoy most about this blog is being able to test my own ideas and assumptions on the wider world. Any feedback I get, whether harsh criticism, enthusiastic agreement, or fraternal correction, presents an opportunity for deeper investigation and growth. The publication of my recent post, 1940s America – The Start of Small Town Decline, gave me just such an opportunity, as a number of readers wrote to me expressing their belief that the start of small town decline predated the war mobilization efforts of World War II. I agree that while war mobilization may well be one piece of the puzzle it is far from the whole story.  So what are some of the other culprits? To get a more comprehensive view of what happened to the small town, I took another look into our economic past.

In Store Brands to Cover Bands: The Lost Art of Local Imitation, I reduced the more nuanced mechanics of local economics to its basic elements of 1) the inflow of money into an economy (exchanging exports for currency) and 2) its subsequent outflow (exchanging currency for imports). I then argued that local economies should strive to slow the money outflow by replacing foreign imports with local goods. The concept I didn’t talk about though is just as important to the health of a local economy: the importance of internal money circulation. It’s not enough for currency merely to enter the system; it has to be put to work. Ideally, a local economy keeps money circulating as long as possible before it leaks out in exchange for exported goods and services. Imagine paying the kid on your block for mowing your lawn, who pays the local convenience store owner for candy, who then pays his bookkeeper, etc. This phenomenon may sound familiar – it’s the local money multiplier effect.

While both chains and locally owned stores often serve as exchange posts for currency and imported goods, study after study has shown that locally owned businesses do a much better job of circulating money locally than their chain counterparts. This is primarily because of differences in:

  1. Where profits are held and spent (Locally vs. with a corporate office or distributed worldwide to stockholders).
  2. Where administrative functions take place (Locally vs. in a centralized corporate office).
  3. Where wages are getting paid out to workers (chains tend to pay local workers less than local shops).

In a nutshell, all stores are ultimately accountable to their ownership and it matters whether that ownership lives locally or is made up of stockholders not tied to a particular place.

All of this sets up a particularly interesting historical episode I found in Stacy Mitchell’s book, Big-Box Swindle. In her book, Mitchell describes the 1920s and 30s as the time of a great national political and economic debate about the role of the chain and the health of the American community. The debate was spurred by an unprecedented explosion of chain stores; in the 1920s alone “the number of chain stores climbed from about 30,000 to 150,000.” Those opposing this new turn started coming out in force:

 “Opponents argued that the chains threatened democracy by undermining local economic independence and community self determination. As they drove out the local merchant – a “loyal and energetic type of citizen” – the chains replaced with a manager, a “transient,” who was discouraged from independent thought and community involvement and who served as “merely a representative of a non-resident group of stockholders who pay him according to his ability to line their pockets with silver.” Many believe, wrote  Supreme Court Justice Louis Brandeis,…, that “the chain store, by furthering the concentration of wealth and of power and by promoting absentee ownership, is thwarting American ideals; that it is making impossible equality of opportunity; that it is sapping the resources, the vigor and the hope of the smaller cities and towns.”

This opposition gained momentum during the 1930s, and a number of laws to tax and limit the role of chains were successfully passed. By the end of the decade, though, the chains had managed to reverse the tide yet again.  From making peace with organized labor to helping farmers by absorbing bumper crops, chain retailers won over key constituencies to help change public opinion. Yet most important was their public outreach campaigns:

 “…the chains continued to cultivate the consumer identity. The more people saw themselves as consumers – not producers, workers or citizens the less concerned they were about the impact on their livelihoods and community life, and the more inclined they were to see the chains as satisfying an essential need for ‘quality, price, and better buying information.’”

By 1940 the great national debate over chains was settled, and today it’s hard to imagine that this was even a debate at all. Seventy-five years later, it’s amazing to think that of the places we shop the most – grocery stores, hardware stores, gas stations, pharmacies, a favorite restaurant, and auto repair shops – fewer are locally owned.  Per Civic Economics, this equates to approximately 3.7 times more money leaking out of the local economy than otherwise would if these businesses were owned locally. After decades of such leakage one transaction at a time, is it any wonder that small towns are now struggling as they are?

11 thoughts on “Small Town Decline: 1920s & the Rise of Chain Stores

  1. This is an argument that has occupied my thoughts for a very long time. I agree with the central thesis here, although I must argue about the resolution of the corporates v non-corporates issue in 1940. You have even put the evidence before us in your piece, the argument is still going on today.

    I believe that what had happened in 1940s US was a generalized acceptance of the chains, as the norm. Why was that? Like everything else, I think that it was a matter of many issues coming together. The long period of austerity that had followed the crash of ’29 had been ended. The output from the efforts of FDR coincided with the war in Europe, which in turn helped boost industrial output in the States. This was one of the factors that created the new consumer; the average Joe who for so many years had no money, suddenly found spare coins jingling in his pocket! It is easy for us in the twenty-first century to overlook the impoverishment that hit such a large swathe of the population in those years between the wars, but it was a huge motivational factor in generating a nation-wide lift in consumerism. That’s not to say that everyone had it good, but by contrast to what had gone before, people felt themselves to be in clover – or at least in work!

    Consumers care for convenience and for the certainties that the brands offer (whether or not they actually deliver!) and with the increase in wealth came an increase in mobility. More people became car owners, and the local stores were now competing not just with the inward thrust of chains, but the outward flow of local people now able to shop miles from town. The idea of the Mall essentially owes its origins to this demographic, the mobile consumer.

    It is one of the issues that undermines Reilly’s Law of Retail Gravitation, the Mall and the out of town parks and plazas were not factored in and clearly now were having a massive effect on destinations. By 1941 the US was preparing for war; this had the effect of increasing mobility and the new brands became even more essential to the new consumers – the mom and pop store that they may have know in their own little town was not replicated elsewhere, so in each new place if they wanted a drug store, a soda, or even the new idea of fast food outlets, they soon came to identify the national chains as the place to stop off – they knew what the offer would be and the price that they’d be expected top pay. These are consumer certainties and in a restless world, we all like to have a few certainties. When Pearl Harbor actually thrust the country into the war that it had been trying to avoid, the corporate brands were able to cement their relationships with huge numbers of Americans, because they went with the troops.

    There is the point also, that these brands, after the war, went global. There were some brands that were established in parts of the world where the US Army and Navy served and remained as a legacy. The fact that the US was really the only advanced industrial nation to have come through the war with its industry intact physically. Those of the far east and in Europe were in a very poor state due to the conflict. The American brands were therefore able to maximise their expansion into the voids left by home-grown brands in all these places. In those countries which were under American control, the brands became ubiquitous.

    This was not true, of course, for the general US retailer, they did not seem to export themselves, except via Hollywood pictures, with the likes of Macy’s, Bloomingdale’s, and others appearing in various feel good movies from the 1930s onwards. The ideas of US retailing had been an export for several generations already, Mr Selfridge with his grand store in London, England was an American. His store set new standards for department stores in England.

    The European example is why I dispute the assertion that the matter of the chains was settled in the 1940s. I see that the problem caused to small town US in the more populous States was being exported to both Europe, Japan and other places, and to the more rural States in America. I believe that the process was ongoing, but it had simply become a more established norm, especially in the great urban centers and especially after the war. The post-war generation either could not remember the pre-war years with any degree of clarity (because the new idea of the teenage consumer had been born!) or the older consumer simply accepted that this was an outcome of what they had always seen as being the American dream, small firms that made good. Isn’t that what McDonald’s is?


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  10. Have you come across any long or short term stats and grafts about the decline of dollar circulation in small towns? A visual of say the last 50 years would be helpful.
    I will continue to read your other posts on this topic. Have you written anything on local alternative currencies as a means of keeping money circulating and invested locally?


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