Why look at the recession of 1920?

The next couple of blogs are going to be about the recession of 1920.  Before we dive into this event I think it is important to give a reason why we are even going to look at it.  It is very important to remember that the Great Depression was not predetermined.  Specifically, the intensity and length of the economic downturn could possibly have been avoided.   If one looks back through American history there had been several economic declines before the Great Depression.  Some of these periods started out very similar to the early 1930’s, but they ended quite differently.  Most notably the length of these other economic downturns were far shorter than the decade plus span of the depression.  

By looking at the recession of 1920, we can have a comparison for when we look further into the Great Depression.  We can gain an understanding of what happens during a recession and that government policy likely has impact on the economy. In this blog we will look at the initial downturn in 1920 to the bottom in 1921.
From 1920 to 1921 the Dow dropped 32.9%(Close to the 33% drop in the DOW from 1929-1930), commodity prices dropped from 248% above 1913 levels to 141% above 1913 levels(there were also drastic declines in commodity prices from 1929-1930).  This downturn was felt by both American Industry and American Agriculture.  For example, if a an industrialist had merchandise that he was expecting to sell and profit from at prices 248% above 1913 prices and then prices take a nosedive to only 141% above 1913 price, that industrialist now has goods which he may have to sell at an unprofitable price.  
Fortunately American Industry and wholesalers were expecting this bust to happen after the boom from World War I.  Wholesalers like Wanamaker’s in early 1920 started selling off their inventory at high prices, expecting a decrease.  This way when prices decreased they would not have items on their shelves that were purchased at high prices.  Wanamaker could restock their inventory at the lower 1921 levels.  In addition to Wannamaker’s, American Industry also prepared for the bust.  During the wartime boom, American industry invested their profits in liquid assets and bought down their debt.  Doing this and not buying more raw materials or equipment, they avoided buying and getting stuck with materials that were relatively high in price as compared to the bottom in 1921.
American agriculture on the other hand did not fair as well.  During the boom years farmers bought more land, which was increasing in value because of high food prices.  Farmers made this decision because of the conventional wisdom that one should invest in what one knows and for farmers that was land.  What happened was as commodity prices fell farmers made less money off of their crops and the value of the land they invested in fell as well.
Interesting wages during this recession did not fall very much.  This was mainly due to the decline in immigration resulting from World War I.  What this caused was a decrease in labor supply, shifting labor supply up and increasing wages.
In sum, the recession of 1920 was a period of steap decline in commodity prices.  This resulted in both industry and agriculture suffering because they items they sold were now selling at lower prices.  Lastly, American industry ended up doing better during the recession than agriculture because of their choices and prediction of the decline.

Next time we will look at what caused this recession.

The Government of the 1930’s

The 1930’s marks a real change in federal government responsibility, power, and spending.  Much of this change can be listed under the title of FDR’s New Deal.  These changes vary from tax rates to banking regulations to labor laws.  It is important to understand that many of the political changes that were made during the 1930’s are still a very powerful part of our lives over 70 years later.

During the 1930’s there were dozens of new government agencies and economic regulations passed.  These include, but are not limited to Fannie Mae, Federal Deposit Insurance Corporation(FDIC),  Civilian Conservation Corps, Civil Works Administration, Federal Housing Administration, Securities Exchange Commission, National Recovery Act, Fair Labor Standards Act(Federal Minimum Wage), Social Security Act, Smooth-Hawley Tariff Act, etc.  If you have been paying attention to our current economic crisis I am sure you have heard of Fannie Mae(Yes this was on Glenn Beck, but watch it for Thomas Sowell), the FDIC, the Securities and Exchange Commission, and Social Security.  All of these programs were started throughout the 1930’s.  These agencies and laws dealt with helping home owners, subsidizing farmers, regulating wall street, minimum wage, increasing tarriffs on foreign goods, and even setting the prices of goods and services.

While most of the above changes were initiated during the four term(yes a four term president) presidential reign of FDR, some were instituted under the Hoover administration.  Most notable the Smooth-Hawley Tariff Act.  This act was signed into law by Herbert Hoover in June of 1930.  It raised foreign tariffs on imports to the US to “historically high levels” and likely contributed to US exports going from $1,334 million in 1929 to $390 million in 1932, due to foreign contries retaliating by raising their tariffs on US imports.  The reason I mention this act under the Hoover administration is because most people are taught the Herbert Hoover was a free market enthusiast, his actions show differently and we will devote a future blog post to this.

Another interesting change in the federal government was in taxes and non-wartime spending.  One would think that the last thing that the federal government would want to do would be to raise taxes during one of the most painful periods in our economic history, but that is exactly what happened.  In 1929 the top marginal tax rate was 25% for those earning $100,000 and above, that’s about $1.2 million in 2010 dollars.  The bottom marginal tax rate started for incomes of $4,000($50,000 in 2010 dollars) which were taxed at 1.5%.  By 1941 the marginal tax rate for those making $100,000 had risen to 69%.  The top marginal tax rate had changed to incomes of $5 million, these earners had to pay a federal income tax of 81%.  Not only did the top marginal tax rate increase, but the bottom did as well.  The bottom marginal tax rate in 1941 started at $2,000(an income of $4,000 in 1929 was a little over $3000 in 1941 dollars) and earners at this level had to pay 10%.  So not only were the wealth facing higher income taxes, but the poor were as-well.

Unlike the tax increases of the 1930’s, it should be no surprise that government spending drastically increased.  In 1929 total federal government expenditures made up 1.3% of Gross Domestic Product, by 1941 federal government expenditures rose to 7.1% of GDP.  For the time period this was a huge increase for a non-wartime period.  Interestingly, federal government expenditures as a part of GDP today are about 20%.

So, this is a glimpse at what the 1930’s looked like when looking at the US government.  Spending increased, taxes increased, federal power increased, and economic freedom and prosperity decreased.  We will discuss later on the impact of all of this on the economy later on.

We will discuss the recession of 1920-1921 in the next blog.

What was the Great Depression in Economic Terms?

This first blog is devoted to describing what the Great Depression was in economic terms.  Despite it being the most famous economic event in United States history, most people have a confused conceptual understanding of the Great Depression and know very few specific economic facts on the event.  This blog will give the economic facts of the period, which we will analyze further as we move through this series.
The Great Depression started in late 1929 and ended in 1941.  The stock market peaked at about 380 in early September of 1929 and unemployment stood at a low 3.2% in 1929 by November of 1929 the stock market had dropped to about 200(about a 50% drop) and during 1930 the unemployment rate had more than doubled to 8.7%. It was not until 1933 that the stock market  and unemployment bottomed out with the DOW at about 40 in July of 1933 and unemployment at a staggering 24.9%.  This would be like if today’s stock market dropping from 12,400 to about 1300 and instead of having 13.7 million people unemployed we would have about 38.5 million unemployed

Gross domestic product had also fallen by 25% from 1929-1933.  Another factor to keep in mind is money supply.  The total US money supply in 1929 peaked at a little over 28 billion dollars by 1933 the total supply of money had shrunk by about ⅓ to about 19 billion(We will talk more about money supply and monetary policy in a later post, but keep this factor in mind). There were also about 10,000 bank failures from 1929-1933. These first couple of years were really the worst of the depression with the stock market, unemployment, GDP, and consumption all hitting their lowest for the duration of the Great Depression.

What most people do not realize is that in the middle of the Great Depression there was a very strong economic recovery from 1933 to 1937.  The stock market rose from 40 in July of 1933 to a little over 190 in March of 1937.  Unemployment had also dropped from 24.9% to 14.3%.  We also saw total US consumption rise by about 50 billion dollars and GDP rise from about 225 billion in 1933 to about 300 billion in 1937.  There was also a steep rise in money supply from 1933-1937.  Total money supply rose by about 12 billion dollars from 1933-1937 to about 31 billion in 1937.

Unfortunately, in 1937 the US fell into a second recessionary period.  The money supply shrank by about 2 billion dollars, which was a lot of money at the time.  Additionally, the stock market dropped to about 120 from 190, unemployment rose to 19% in 1938 from 14.3%, and both GDP and consumption shrank from their 1937 highs.  While this recessionary period was not as severe as the 1929-1933 period its impacts were still felt in a painful way by the United States. 

It was not until 1941 that the Great Depression officially ended with GDP and consumption passing 1929 levels and unemployment falling to 9.9%, though it was not until 1954 that the stock market returned to its 1929 levels.

The facts and figures in this blog will be important to keep in mind for the rest of this series.  I think it is vital to know details like these if one wants to truly be able to understand and teach others about the depression.  I see these facts as the glue the holds the story of the Great Depression together. These facts and figures also raise some questions, like what caused almost 12 years of economic turmoil? Additionally, what brought us out of the most infamous economic downturns in US history? We will shed some light on these questions and more as we move through the series.

In the next post we will present a political overview of the period.