The Great Depression of 1920??

Everybody knows about the Great Depression, beginning with Black Tuesday, October 29, 1929, the secondary crash in the late summer of 1930, and an initial recovery beginning in 1933. Unemployment peaked at about 25%. Recovery was lackluster, with a secondary recession occurring in 1937. Unemployment stayed high through a weak economic recovery, still at 15% just before the war machine cranked up for World War II in 1941.

Although war production boosted GDP, the standard of living stayed depressed throughout the war years, with widespread rationing a major cause. Society as a whole didn't really recover until after the war ended in 1945. In total, the Great Depression significantly impacted the standard of living for most Americans for a period of 16 years.

Many people aren't aware that there was a depression almost as severe in October of 1920. The impacts in the first few months were on the same level as those of 1929, with the market down 33%, industrial production down 30%, GDP down 17%, and a spike in the unemployment rate from 4% to almost 12%, all occuring in a short time. Nor are they aware that by the fall of 1921 the recovery from this major crash was well underway.

Two Major Questions

When I first learned the story of the 1920 depression, two major questions came to mind. The first major question that came to mind immediately when comparing the two downturns is obvious. How is it that two depressions, very similar in initial impact, had such radically different recovery periods?

The Response to the Depression of 1929

The story of the heroic battles to restore the economy following the 1929 crash are legion. Although it's sometimes not stressed, Herbert Hoover moved quickly to stimulate the economy with public works projects such as the Hoover Dam, tariffs such as the Smoot-Hawley Tariff, and the Federal Home Loan Bank Act, intended to spur new home construction and reduce foreclosures. In addition, Congress passed the Revenue Act of 1932, which was the largest peacetime tax increase in history to that time, raising the top tax bracket from 25% to 63% and increasing corporate taxes as well. These efforts did nothing to bring about a recovery, with unemployment rising above 25%, leading to his defeat in the 1932 election by Franklin Roosevelt.

The campaign itself was interesting, to say the least, and you may find some of the details of Franklin D. Roosevelt's campaign surprising.

Economist Marriner Eccles observed that "given later developments, the campaign speeches often read like a giant misprint, in which Roosevelt and Hoover speak each other's lines." Roosevelt denounced Hoover's failures to restore prosperity or even halt the downward slide, and he ridiculed Hoover's huge deficits. Roosevelt campaigned on the Democratic platform advocating "immediate and drastic reductions of all public expenditures," "abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagances" and for a "sound currency to be maintained at all hazards."

Once Roosevelt attained office, however, he decided Hoover's approach wasn't so bad after all. In his first few days he passed the Emergency Banking Act and signed the Glass-Steagall Act, creating another banking bureaucracy, the Federal Deposit Insurance Corporation. He expanded Hoover's relief program for the unemployed under a new name, the Federal Emergency Relief Administration and upped the ante with the Civilian Conservation Corps.

He also greatly expanded the powers of the Federal Trade Commission, expanded Hoover's Reconstruction Finance Corporation, and created the Agricultural Adjustment Administration, which paid farmers to take land out of production and cut herds. The National Industrial Recovery Act was created to have a similar impact on manufacturing, which set minimum prices, created non-compete agreements, and suspended anti-trust laws. In 1934, the Securities and Exchange Commission was created to regulate Wall Street. And through it all, the "pump-priming" which we today call "stimulus spending" continued and even accelerated.

Yet the economy stayed moribund, collapsing again in 1937. As we saw earlier, while the GDP improved considerably with the ramping up of the war machine for World War II, it wasn't until the war ended in 1945 that the economy truly began to recover, and the DOW didn't reach its 1929 high again until 1954.

The Response to the Crash of 1920

Nada. Zip. Nothing. A year before the crash, in October 1919, Woodrow Wilson had suffered a serious stroke.

With few exceptions, Wilson was kept out of the presence of Vice President Thomas R. Marshall, his cabinet, and Congressional visitors to the White House for the remainder of his term. His wife, Edith, served as his steward, selecting issues for his attention and delegating other issues to his cabinet heads. Eventually, Wilson resumed his attendance at cabinet meetings, but his input there was perfunctory at best.[139] This was one of the most serious cases of presidential disability in American history and was later cited as an argument for the 25th Amendment.[140] The full extent of his disability was kept from the public until after his death on February 3, 1924.

When Warren G. Harding assumed office in January 1921, he took no immediate action. By the fall of his first term in office, before he had addressed the economy in any major way, the recovery was already underway.

Economist Robert Gordon stated “government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive. ... Despite the absence of a stimulative government policy, however, recovery was not long delayed.” Kenneth Weiher, an economic historian, notes, “despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” He then briskly concedes that “the economy rebounded quickly from the 1920-1921 depression and entered a period of quite vigorous growth.”

Summary

Now that you know the story of the 1920 economic failure, the difference in the federal government's reaction to 1920 and 1929, and the huge difference in the recoveries following the two events, I bet you can answer the second major question that comes to mind immediately when comparing the two depressions.

"How come they don't teach about the Depression of 1920 in government school?"

...and that's all I have to say about that.

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Tom Woods, economic historian and senior fellow of the Ludwig von Mises Institute, tells much of this story, and a whole lot more in addition, in the video below, Why You've Never Heard of the Great Depression of 1920. Well worth the 50 minutes and highly recommended.