Posted on 09/22/2010 6:31:25 AM PDT by SeekAndFind
The Panic of 1920 started out as a contender for the greatest depression of all time, with a drop in prices and production during its first twelve months that dwarfed those of any other economic crash, and she piled on an unemployment rate that skyrocketed from invisible to 12% in a flash. Ignoring calls to do something, anything, to "help", Washington, DC simply allowed the economy to adjust wherever it chose to go. In tandem, Federal Reserve officials looked upon the rapid deflation in prices not with horror but with a declaration of its necessity. Yet, despite the lack of government intervention and monetary "pump-priming", the economy corrected itself within two years. As a modern day American, I can hardly imagine.
Prior to the denouement, the Fed money spigot had been on full blast for seven years; an index of wholesale prices had surged from a base of 100 in 1913 to 226 in early 1920. One economist from the time noted a concurrent "outbreak of speculation in business and stock market circles that for recklessness has had few parallels".
The storm broke in May of 1920 and arrived as these things usually do - almost everyone at the opera was caught napping when the lights suddenly came on. Bank failures, which numbered 63 in 1919, spiked to 506 by 1921. By June of the latter year, the money supply had dropped 9%, GNP 17%, and the index of wholesale prices collapsed from 247 in May of 1920 to 141 by July of 1921. To this day, the index has yet to show a more precipitous drop in such a short time.
Across America, the suffering began
The prevailing opinion on the proper response was summed up in Warren G. Harding's speech as he accepted the 1920 Republican presidential nomination. He pledged an "intelligent and courageous deflation, and (to) strike at the government borrowing which enlarges the evil". He was a man of his word. Between 1920 and 1922, the federal budget fell by almost one half, tax receipts by 38%, and outstanding debt by 5%. Meanwhile, Federal Reserve officials made no attempt to maintain prices at any level.
With prices allowed to adjust, the recovery was already underway by August of 1921.
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Amazing the parallels between then and now.
I’m a history teacher and I try to talk about “Silent Cal” every time I get.
I have to study Harding and Coolidge. My father always believed Coolidge was one of the great Presidents. I didn’t know about the Harding depression and his successful response until well after college! And I was an economics and poly sci grad. Completely blacked out of the schools and economics study. Stunning ommission because it doesn’t match their theories.
Not quite.
Market trading during the 20s was built on the sand of borrowed money, under the assumption that the markets would always go up. (Same logic, and almost the same mechanism, that fueled the market disaster in 2008.) A collapse was inevitable.
Hoover's policies had little to do with the cause of the crash. His policies after the crash, however, certainly made things worse.
On the upside, it turns out that one Winston Churchill had bought into the hype and invested heavily in the US stock market. He was wiped out in the crash.
As a result, he had to forego the luxurious retirement he had planned, and instead had to go back to work writing and speaking about the issues of the day.
Were it not for the stock market crash, it is likely that Churchill would not have risen to Prime Minister of Britain in the world's time of need....
I traveled the same route to finding out about these guys.
The economic growth and production during the 20s were real. Valuations on Wall Street outpaced reality. There was a radio bubble, just like the internet bubble of 1999. The crash was not that severe initially. I've looked at the charts from 1929; it was bad, sure. We've seen similar in 2000 and in 2008, and we recovered. Nasdaq went from a bubble high of 5200 to something like 1800, and then was recovering a little when 9-11 hit and it went to something like 1500. Now THAT is a crash. Dow went down from 14 to what, 7, in 2008. Now THAT is a crash. It took years of grinding for the market to reach its lows in the 1930s, but initially, in October 1929, it was not that horrendous, and it was not impacting the economy at large.
Hoover, being a technocrat, new age man, couldn't resist trying to fix it. Instead, he made it worse, and his policies turned a stock market crash and short term recession into a full blown depression that got worse over the remainder of his administration. So, in that sense, I do believe that Hoover's policies helped killthe pro-business policies that created the boom of the 1920s.
Hoover, like his successor Roosevelt, was a Progressive. He was the Mitt Romney of his day. Government is always the solution for those guys. We need to return to Silent Cal.
We agree... thanks for filling in details.
Had Coolidge been in power in 1929, I believe we wouldn't even remember the stock market crash of 1929, except as one of about 8 such "panics" that we have had in our history.
Probably true. Reagan's response to the Crash of 1987 was to let the markets recover on their own, and they came back pretty quickly.
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