– With the start of the new year, we usually look back at history. So the first post of 2009 I’ll give a brief summary of the post WWI recession. Although the crash and recession that occurred in 1919 was different, we can easily see many similarities between what has happened in the past with what has happened recently. I’ll discuss some of those at the end of the article.
– The post WWI recession took place between the years of approximately 1919-1921. Although it was a deep recession, it was not a depression.
War : There was rapid productivity growth due to war time production (manufacturing, agriculture, industrial, services, etc) especially in Central Europe & North America (NA). Factories and industries were producing war related products. In turn, more jobs were created and more people were employed. The overall spending power increased. The rapid productivity growth also caused high inflation, as prices and wages increased. The governments spent a lot of money on the war, but also accumulated huge debts. After the war, governments had no more money, and could not spend to stimulate the economy. The end of the war time production along with increased labour supply from returning troops helped contribute to high unemployment and the decline of wages. Factories producing war related products were becoming idle.
Farming & Agriculture : Prior to the recession the farms & agriculture industry also grew significantly. There was heavy investment particularly between the years of 1910-1914, and steady increase up until 1919. The demand for agriculture grew both for the war efforts and for the increased spending power of the economy in general. This increased competition & productivity, which also resulted in higher equipment, operation, & wage costs for the industry. A large amount of loans were taken out for capital expenditures, and expansion growth. These loans became difficult to repay with the end of the war and decline of production.
Credit : In 1919 the US govt bonds were at 4%, while in 1920 they were at 7%. Banks that bought old 4% govt bonds experienced extreme difficulties and liquidity issues, because everyone was dumping the bonds for the newer 7% bonds. This helped contribute to the lack of credit being extended by the banks into the economy, and therefore created a lack of buying power. The combination of the loss of buying power, with fewer people repaying loans, and the dumping of the govt bonds contributed to the financial crisis. The problems of the bank multiplied the problems of the economy, in the same way as in the 1907 panic before it. It caused the problems to become more severe then they originally were.
– 60 bank failures in 1919.
– 50 bank failures in 1920.
– 500 bank failures in 1921 (worst of that recession, with global economy sharply declining).
– Economy shrank 21.5% in 1919-1921.
– Unemployment hit 10.5.%
Note that in the early 1900s there were many small rural & community banks, and many of were in towns that had populations of less than 3000 people.
– Inflation occurred prior to the recession with wages, costs, & productivity increases. Deflation occurred with the onset of the crash & recession. Companies cut production and in turn employment, as consumers and governments delayed and made fewer purchases. People, industry, & governments all borrowed money. However, with the decline of the economy, productivity, wages, and price drops the burden of the loans increased because the loans taken out were now worth more than the assets that were purchased. As an example, the burden was heavier on the homeowner, as the mortgages were larger than the market price of their homes. With wages dropping and unemployment rising quickly, loan defaults naturally increased, causing a ripple effect of financial problems.
– When the recesssion ended, it lead to the period known as the “Roaring 20s”, which ended in 1929 when the Wall Street crash (Black Tuesday) marked the beginining of another downturn, the Great Depression (1929 – 1939).
Some similarites can be seen between the past & present. Although the causes may be different, they played no less of a role in this economic downturn than their counterparts did decades ago.
War in Iraq & Afghanistan, and other : US has spent billions in war & security related expenditures & upgrades, fueling a boom in military & defense industries. However, Canada, Britain, France, China, and other industrialized nations have also increased their military & defense spending significantly as well.
Farming & Agriculture : Globally, agriculture & related industries have increased productivity heavily, resulting in a run up of equipment, fertilizers, wage costs, and food prices. Large capital expenditures (many financed by loans) by government & industry have been made for growth & expansion.
Energy & Natural Resources : Although not really a large cause of the post WWI recession, it has been in this one. Similar productivity increases & large capital expenditures (many financed by loans) for growth has been seen, causing similar cost & price increases.
Inflation & Deflation : With many industries growing at neck-breaking speed in the last few years, the result was increased wages & spending power. People had more money and could purchase more. Prices of goods & services also rose. However, it reached a point where prices & costs were becoming too large. And again with productivity declines leading to a decline in spending (government, industry, consumer) employment has also fallen. Wages are being cut to save money, and prices are falling. Especially notable are the US home prices. Mortgages again, are now larger than the market price of the home.
Credit market : The financial crisis of the banks are again a large issue. Although this time the instruments of destruction are a bit different (subprime mortgages and exotic debt/asset-backed investments), and the loose lending practices were perhaps not as extreme. However, the problems of bank capital, available credit, loan defaults, and other related problems of the banks have amplified the problems of the economy.
Even if you haven’t experienced the downturns first hand, knowing about them is priceless. The economies of the world are in very challenging times and the problems will not go away quickly. However, I’m confident they will be resolved in due time, as they have in the past. The economies will then grow & expand again, but its pretty safe to say that they will also fall & shrink again as well. So don’t worry too much, as it something you cannot control. What you should worry about is your plan & strategy for surviving, as well as profiting from the economic downturn. Its January now, and it is a good time to review your plan (short & long term), and then re-evaluate your strategies for executing your plan.
Feel free to post questions, comments, or topic suggestions.
Thanks & Happy Investing!
The Investment Blogger