1920: The Crash That Cured Itself, by Pedro Almeida Jorge

After World War I, there was an epic financial and economic crash that was righted in less than two years. What did the US government do? Very little. From Pedro Almeida Jorge at austriancenter.com:

The Spanish Flu of 1918 is an event that, unsurprisingly, is being revisited by many observers today. And yet, at the same time, another major event occurred a century ago which we would also do well to remember: namely, the largely forgotten economic depression of 1920.

We all hear, from time to time, about the ghost of the 1929 Crash, of the dreadful decade of the Thirties, of the Great Depression from which the world (supposedly) only recovered at the cost of a new World War. It is even likely that, in the COVID-19 context we currently face, many people believe that, unless all national and international governments and organizations move ahead with drastic measures, we are condemned to a similar fate. Nonetheless, the depression of 1920 can provide us with a starkly different picture.

After the end of World War I, some months of high profits and renewed expectations followed. Unfortunately, due to the gigantic inflation and government controls introduced during the war, as well as the deaths caused by that same war and the pandemic that followed, a great economic readjustment was unavoidable, which eventually came along in 1920.

Renowned financial analyst James Grant, author of the book The Forgotten Depression: 1921: The Crash That Cured Itself, provides shocking data for the United States. Grant tells us that the Federal Reserve index of industrial production fell by 31.6% from 1920 to 1921. In comparison, in the crisis years 2007-09, it “only” fell by 16.9%. And with respect to the unemployment rate, Grant estimates that it may have reached as high as 15.3%.

Meanwhile, according to Grant, “over the course of 12 months, wholesale prices plunged by 36.8 percent, consumer prices by 10.8 percent and farm prices by 41.3 percent (for speed of decline, not even the Great Depression would match the break of 1920–21). The Dow Jones Industrial Average, then comprising 20 stocks rather than today’s 30, crested in November 1919 at 119.62 and bottomed in August 1921 at 63.9, for a peak-to-trough decline of 46.6 percent.”

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