Mainstream media is full of ‘Great Depression’ comparisons to today’s credit crisis. But Justice Litle says there are actually many similarities to be found a decade earlier. In 1919, there was a stock market crash, commodity slump, and a major bank bailout. But there is some hope: out of all that misery, the “roaring twenties” were born.

More from Justice in Taipan Daily:

The 1920s – widely known as “the roaring twenties” – were a time of great dynamism and change in the United States.

The decade earned its nickname and then some. Car ownership took off… movies and radio captivated the nation… and the stock market went through the roof.

The Dow went from a trough of 63.90 in 1921 to a peak of 381.17 in 1929. That’s just under a 500% gain in a mere eight years’ time. To repeat such a feat today (from the 2008 lows on a closing basis), the Dow would have to top 48,000 by the year 2016.

Sounds hard to imagine, doesn’t it? And of course, we know how the roaring twenties ended. (Badly… very badly.) But rather than talk about the crash of 1929 – a topic most worthy of future discussion – let’s talk about how the roaring twenties began.

Grizzly Beginnings

What few realize is that the twenties kicked off with a raging bear market… not unlike the grizzly we’re wrestling with today.

We noted a low point of 63.90 in 1921, but didn’t highlight where the Dow had been before that point. The Dow had reached a previous peak of 119.62 in the year 1919. In the two years that followed that 1919 peak, the market saw a gut-wrenching 47% decline. (Sound familiar?)

Imagine how you might have felt as an investor in the year 1920. Would you have any notion that, in less than eighteen months, a stock market boom for the ages would begin? Not likely.

It’s far more likely you would have been in a state of mild catatonic shock, fretting over how your portfolio had been cut nearly in half after the 1919 peak.

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Full of Surprises

As we discussed just recently, history is full of surprises. Am I calling for Dow 48,000 by 2016? Of course not. I have no idea how things will look that far out.

It may be that a wholly different index – something more akin to the Nasdaq – captures the next boom, while the Dow gets left behind. It may be that the biggest action takes place on a foreign shore. We just don’t know… no one can look that far out.

But we can remember that “endless gloom” scenarios are just as foggy and unsupported as “endless boom” ones. And once freed from the bounds of conventional thinking, we can explore the realm of the possible.

Consider, for example, how technology – car technology in particular – served as the driver (no pun intended) for much of the 1920s optimism. Could technology play a similar role in the coming decade? It’s certainly possible.

When you consider the intertwining roles of computer processing power, biotech, healthcare and alternative energy – not to mention breakthrough concepts like cloud computing – there’s just no telling what could be next. (By the way, if you really want to blow your mind on this topic, check out The Singularity is Near by Ray Kurzweil.)

The Subprime of Yesteryear

Something else history teaches is that it’s really, truly, all been done before. Techno-wizardry aside, there is nothing truly “new” in markets. As Jesse Livermore observed, there can’t really be anything new because speculation is as old the hills – and human nature is the same.

We can see this by winding the clock back 90 years or so…

In the years leading up to the 1919 peak, the frenzy du jour was tied to commodity prices and farmland. In his excellent history, Money of the Mind: Borrowing and Lending from the Civil War to Michael Milken, James Grant tells the tale:

Like bull markets in stocks, the bull market in farmland engendered the belief that prices would rise forever. “Speculators who had no interest whatever in farming bought land for the 6 percent or 8 percent annual rise that seemed a certainty throughout the early years of the century…” The rise in farm prices had only begun.

The farmland frenzy – and a rising tide of commodity prices, spurred by an inflationary gold boom – went right on making speculators rich through World War I and beyond. Grant continues:

The price of wheat was 62 cents a bushel in 1900. It was 99 cents in 1909, $1.43 in 1916, and $2.19 at the peak in 1919. To put $2.19 in perspective, it was not a price seen again until 1947.

Is this starting to feel familiar yet?

The vastly expanded gold supply of those years acted like a money pump, having the same effect as “Easy Al” Greenspan’s money spigot. Farmland was the main speculation vehicle – not unlike today’s residential real estate. Commodities soared and swan-dived in all too familiar fashion.

And leverage (i.e. speculation fueled by debt) made it all worse, as Grant points out:

The collapse of prices in the early 1920s would have been devastating enough, but the damage was compounded by debt. By the summer of 1921, crop prices were down by no less than 85 percent from the postwar peak. Nebraskans, finding that corn had become cheaper than coal, burned it. As it does in every market, the fall in prices revealed the weaknesses in the structure of credit that had financed the rise.

The parallels are amazing. They were even burning corn at the end – much as America elected to burn corn in its gas tanks via loony ethanol subsidies.

And there were plenty of early warnings back then too. Doomsayers were calling farmland an unsustainable bubble as early as 1915 – four years before it all went bust.

National City Comes a Cropper

And here’s the icing on the cake: we even saw a major bank get a “bailout” as a result of the commodity bust.

Many a money house bit the dust after commodity prices caved. No fewer than 724 (seven hundred and twenty four!) banks failed in the three-year span of 1919 through 1921. One of the biggest players of them all, National City Bank, nearly went under too as the result of a bad sugar bet.

The price of sugar had rocketed higher in 1919, when Russia failed to deliver its expected sugar-beet crop. By 1920, the price of sugar had risen nearly five-fold on the strength of speculative buying. Nat City got a piece of the action by plowing 80 percent of its core capital into loans to Cuba (a big sugar producer).

To make a long story short, the price of sugar eventually collapsed… Nat City’s all-in Cuba bet went “toxic”… and the once-revered bank found itself on the brink of insolvency.

The bank only survived by pulling off a very slick accounting trick – a trick not far removed from the “special investment vehicle” peek-a-boo tricks of recent years. The move was a blatant violation of the day’s banking codes, but Uncle Sam averted his eyes. Later that same decade Ferdinand Pecora, Chief Counsel to the United States Senate Committee on Banking and Currency, referred scathingly to the move as “this $25,000,000 bailing out.”

(Alas and alack, Nat City made it through that carnage but not through 2008. The venerable old bank was scooped up by PNC Financial a few weeks ago in an all-stock deal worth $5.2 billion.)

Takeaways for Today

So what’s the point of this trip down memory lane? There are at least a few takeaways we can rummage up:

• As Mark Twain once said, “History doesn’t repeat, but it rhymes.” Some of what’s happening now is breathtaking in scope, but none of it is truly new. Bailouts, booms, busts… we’ve seen it all and we’ll see it again.
• It may be improbable to imagine equities going on an epic tear in the next ten years… but no more improbable than it might have seemed from the beaten-down vantage point of 1921.
• We can’t use the past to predict the future – every era has its own quirks – but we can sure as heck learn from it.

Source: The “Roaring Twenties” Began with a Commodity Bust - and a Bank Bailout

While things can always get worse, things are rarely as bad off as they might seem.