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.