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The CFA Society Chicago Book Club met for their monthly meeting on April 21, 2015 to discuss The Forgotten Depression, by James Grant.  We went around the room and shared our backgrounds and kicked off our discussion on the 1920-1921 “Forgotten Depression”.  About a decade before the Great Depression of 1929-1933, there was a volatile economic downturn that lasted from January 1920 to July 1921.  It could be said to be the last governmentally unmedicated depression with the hero being the one and only invisible hand.

A surprise to many was when the war ended in November 1918, the postwar depression and deflation most expected didn’t immediately happen.  Inflation was in the double digits during the war and continued into 1919.  When peace didn’t immediately yield deflation, many thought the inflated war time wages and prices were here to stay.  Increased prices invited speculation and the speculators were lured by the low and easy money.  Businesses that should have gone under stayed afloat due to the easy money and ability to refinance.  Investors, farmers, and businesses expected the double digit inflation to continue into the 20s.  It didn’t happen.  The auto industry ended up collapsing in 1920 as Ford and GM both invested based on their forecast of rising prices.  Farmers had it worse than autos as farmers borrowed heavily to plant fencepost to fencepost in anticipation of rising prices.  In NYC, National City Bank lent unwisely against the collateral of sugar in Cuba.  By 1921, prices collapsed to 1913 levels.  Finally people began to see that the speculative nature following the war had collapsed.  NYSE stock prices fell 40%, unemployment which was not yet measured was certainly in the double digits, corporate profits collapsed, exports halted, demand dried up, and there was a run on the banks.    Benjamin Strong who was governor of the Fed at the time was a believer in the classical approach to money and banking.  When Benjamin Strong reflected on what was to come, he advised that there will be heightened unemployment, there will be deflation, there will be hard times, but the bad times will end and the economy will move forward.

By 1922, we saw a liquidation of labor that turned out to be what launched the roaring 20s.  The period can also be described as the Great Inflation followed by the Great Deflation with the volatile recession lasting a short 1.5 yrs peak to trough.


Upcoming Schedule:

May 19, 2015: How Latin America Weathered the Global Financial Crisis by Jose De Gregorio

June 16, 2015: The Billion Dollar Mistake: Learning the Art of Investing through the missteps of Legendary Investors by Stephen Weiss

July 21, 2015: On Saudi Arabia: Its People, Past, Religion, Fault Lines – and Future by Karen Elliott House

*(NOTE: Those who attend the July Book Club meeting will receive a free copy of “Superpower: Three Choices for America’s Role in the World” by Ian Bremmer)

August 18, 2015: Superpower: Three Choices for America’s Role in the World” by Ian Bremmer

September 15, 2015: TBD


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