Early 20th Century Economic Downturns by Alex Merced The Early 20th Century is wrought with several tales

of economic woe and recovery leading up to the great depression. This period of history is a key one to understand as it stands as an example of a time that the country would not like to return to, but if that day ever came being able to understand it can help one prepare their investment portfolio for such an event. The Panic of 1907 Coming out of the 19th century the US banking system was quite fragile due several regulations as to the branching of banks. Since banks could generally have no branches in most states it rendered them unable to diversify their deposits geographically this made them more prone to banking panics if news had alarmed the local populace. During this period of time Charles Morse decided to attempt to corner the copper market, an attempt which failed. Morses failed attempt to corner the copper market led to runs on several banks, and eventually to the fall of the Knickerbocker trust company. The fallout of this news results in causing bank panics throughout the country. Eventually J.P Morgan with the help of other bankers such as Rockefeller steps in and injects liquidity into the banking system to stave off the crisis of confidence that occurred. Morgan and many of the other bankers in hopes to not have to intervene in the market again met at Jekyll Island in Georgia in order to discuss the creation of a central bank. The Government Expansion of 1913 In 1913, under the presidency of Woodrow Wilson several institutions that changed the US government forever were created, primarily the U.S. Income Tax and the Federal Reserve. These institutions allowed government to redistribute resources in the economy vast greater ways than any time previous. The Income tax brackets in the beginning where very minor and inconsequential as you can we can see with this tax chart from the Tax Foundation (TaxFoundation.org)1.

http://www.taxfoundation.org/publications/show/151.html

The Federal Reserve was also very minor in function serving as primarily only as lender of last resort to help prevent banking panics and provide stability to the system. What happens later on sets the state for some of the largest downturns in US History. The Forgotten Depression on 1920 World War I was at its end and here the economy was in 1918 with tax rates which were a far cry from the 7% top marginal rate that was sold to the public back in 1913.

By 1920 the economy dips into one of its steepest declines in history and unemployment rapidly climbs to 11%, yet the response by the government is very particular. As Warren Harding comes into office, the tax rates are lowered significantly, the budget on the government cut and instead of a worsening depression as would be expected by modern day standards the economy quickly rebounded. Below are the tax rates of 1921 as the recession was ending.

As the decade continued Warren Harding had passed away and Calvin Coolidge in his place was far more aggressive in slashing the budget and taxes see the top marginal tax rate go back to as low as 25%. There was very little monetary intervention in 1920 on behalf of the Federal Reserve due to their main credit expanding tool, Open Market Operations, had not begun to be used so essentially very little fiscal or monetary intervention occurred in what was a very deep depression yet it only lasted one year unlike what was to become known as the great depression. The Great Depression In the 1922 the Federal Reserve begins entering Open Market Operations2 where it begins buying treasuries to fund its operations and also in its attempts to smooth out the business cycle. So while statistics show that prices were very stable during the 1920s the reality was that without the treasury purchases by the Fed prices should have dropped because of huge gains in productivity from new technologies promulgating in the economy. The effects of the Federal Reserves treasury purchases do not show up in price data of the time, but they had made purchases in 1922, 1924, and 1927. The Results of these policies was to inject large amount of capital into the financial system which led to the speculation that created the stock market crash in 1929. Instead of responding with little intervention like Harding back in 1920-21, the current President Herbert Hoover responded with major government interventions such as: Mexican Repatriation: The Forced Migration of 500,000 Mexicans & Mexican Americans to Mexico. Smoot Hawley Tariff (1931): Established Tariffs on imports, which resulted in retaliatory tariffs from other nations. Bank Cartelization: convinced banks to form a consortium called the National Credit Corporation Price Fixing of Housing: Passes the Federal Home Loan Bank act to prevent foreclosures and the decline of home prices.

http://seekingalpha.com/article/238987-open-market-operations-then-and-what-might-be-done-now

Make Work Programs: Creates the Reconstruction Finance Corporation to help for public works programs to fight unemployment. Increased Taxes: Raised the top marginal tax rate to 63% in 1932

None of these policies seemed to make things any better; in some cases it made things worse as it prevented the economy from restructuring. He then runs for re-election and loses in a landslide to Franklin Delano Roosevelt. FDR takes many of Hoovers policies and increases them and introduced many other price fixing measures to new extremes3. This price fixing understates inflation while the money supply skyrockets after going off the gold standard in 1933 making GDP statistics seems as if they economy was growing while unemployment was still high. Huge increases in the government spending component of GDP also must be considered when taking a look at GDP statistics of the time. Its not till post World War II (Note: World War II is also market with excessive price fixing distorting economics statistics of the time as written by the likes of Robert Higgs and Art Carden4) that economy finally breaks out of its slump as its factories could now return to producing consumer goods. Many of the United States competitors in the global goods market were now focused on rebuilding from the fallout of the War giving the US a great competitive advantage and head start for the next several decades.

http://www.thefreemanonline.org/columns/our-economic-past/the-nra-how-price-fixing-perpetuated-the-greatdepression/ 4 http://mises.org/daily/5069/World-War-II-Did-Not-End-the-Great-Depression