One 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:

Where profits are held and spent (Locally vs. with a corporate office or distributed worldwide to stockholders). Where administrative functions take place (Locally vs. in a centralized corporate office). 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?