![Returning from World War I](https://upload.wikimedia.org/wikipedia/commons/d/d2/Returning_from_World_War_I.jpg)
The Depression of 1920–1921 was a sharp
deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...
ary
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
in the United States, United Kingdom and other countries, beginning 14 months after the end of
World War I
World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, the United States, and the Ottoman Empire, with fightin ...
. It lasted from January 1920 to July 1921.
[US Business Cycle Expansions and Contractions](_blank)
National Bureau of Economic Research
The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...
. Retrieved on September 22, 2008. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.
There was a two-year
post–World War I recession
The post–World War I recession was an economic recession that hit much of the world in the aftermath of World War I. In many nations, especially in North America, economic growth continued and even accelerated during World War I as nations mo ...
immediately following the end of the war, complicating the absorption of millions of veterans into the economy. The economy started to grow, but it had not yet completed all the adjustments in shifting from a wartime to a peacetime economy. Factors identified as contributing to the downturn include returning troops, which created a surge in the civilian
labor force
The workforce or labour force is a concept referring to the pool of human beings either in employment or in unemployment. It is generally used to describe those working for a single company or industry, but can also apply to a geographic reg ...
and problems in absorbing the veterans;
Spanish flu
The 1918–1920 influenza pandemic, commonly known by the misnomer Spanish flu or as the Great Influenza epidemic, was an exceptionally deadly global influenza pandemic caused by the H1N1 influenza A virus. The earliest documented case was ...
;
a decline in
labor union strife; changes in
fiscal
Fiscal usually refers to government finance. In this context, it may refer to:
Economics
* Fiscal policy, use of government expenditure to influence economic development
* Fiscal policy debate
* Fiscal adjustment, a reduction in the government ...
and
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
; and changes in price expectations.
Following the end of the depression, the
Roaring Twenties
The Roaring Twenties, sometimes stylized as Roaring '20s, refers to the 1920s decade in music and fashion, as it happened in Western society and Western culture. It was a period of economic prosperity with a distinctive cultural edge in the ...
brought a period of economic prosperity between August 1921 and August 1929, one month before the
stock market crash
A stock market crash is a sudden dramatic decline of stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especia ...
that triggered the start of the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
.
Overview
The recession lasted from January 1920 to July 1921, or 18 months, according to the
National Bureau of Economic Research
The National Bureau of Economic Research (NBER) is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic c ...
. This was longer than most post–World War I recessions, but was shorter than recessions of 1910–1912 and 1913–1914 (24 and 23 months respectively). It was significantly shorter than the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
(132 months).
Estimates for the decline in
Gross National Product
The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...
also vary: The
U.S. Department of Commerce
The United States Department of Commerce is an executive department of the U.S. federal government concerned with creating the conditions for economic growth and opportunity. Among its tasks are gathering economic and demographic data for busin ...
estimates that GNP declined 6.9%; Nathan Balke and
Robert J. Gordon estimate a decline of 3.5%; and
Christina Romer
Christina Duckworth Romer (née Duckworth; born December 25, 1958) is the Class of 1957 Garff B. Wilson Professor of Economics at the University of California, Berkeley and a former chair of the Council of Economic Advisers in the Obama administ ...
estimates a decline of 2.4%.
There is no formal definition of
economic depression, but two informal rules are a 10% decline in GDP or a recession lasting more than three years, and the unemployment rate climbing above 10%.
The recession of 1920–1921 was characterized by extreme deflation, the largest one-year percentage decline in around 140 years of data.
The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. Wholesale prices fell 36.8%, the most severe drop since the
American Revolutionary War
The American Revolutionary War (April 19, 1775 – September 3, 1783), also known as the Revolutionary War or American War of Independence, was a major war of the American Revolution. Widely considered as the war that secured the independence of t ...
. This is worse than any year during the
Great Depression
The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
(although adding all the years of the Great Depression together yields more cumulative deflation). The deflation of 1920–21 was extreme in absolute terms, and also unusually extreme given the relatively small decline in gross domestic product.
Unemployment rose sharply during the recession. Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. Both agree that unemployment quickly fell after the recession, and by 1923 had returned to a level consistent with
full employment.
During the recession, there was an extremely sharp decline in industrial production. From May 1920 to July 1921, automobile production declined by 60% and total industrial production by 30%.
At the end of the recession, production quickly rebounded. Industrial production returned to its peak levels by October 1922. The
AT&T
AT&T Inc. is an American multinational telecommunications holding company headquartered at Whitacre Tower in Downtown Dallas, Texas. It is the world's largest telecommunications company by revenue and the third largest provider of mobile te ...
Index of Industrial Productivity showed a decline of 29.4%, followed by an increase of 60.1%—by this measure, the recession of 1920–21 had the most severe decline and most robust recovery of any recession between 1899 and the Great Depression.
Using a variety of indexes,
Victor Zarnowitz found the recession of 1920–21 to have the largest drop in business activity of any recession between 1873 and the Great Depression. (By this measure, Zarnowitz finds the recession to be only slightly larger than the
Recession of 1873–1879,
Recession of 1882–1885,
Recession of 1893–1894, and the
Recession of 1907–1908.)
![Dow 1918-1922](https://upload.wikimedia.org/wikipedia/commons/e/e0/Dow_1918-1922.jpg)
Stocks fell dramatically during the recession. The
Dow Jones Industrial Average
The Dow Jones Industrial Average (DJIA), Dow Jones, or simply the Dow (), is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The DJIA is one of the oldest and most commonly followed equity inde ...
reached a peak of 119.6 on November 3, 1919, two months before the recession began. The market bottomed on August 24, 1921, at 63.9, a decline of 47% (by comparison, the Dow fell 44% during the
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic or Knickerbocker Crisis, was a financial crisis that took place in the United States over a three-week period starting in mid-October, when the New York Stock Exchange fell almost 50% from ...
and 89% during the Great Depression). The climate was terrible for businesses—from 1919 to 1922 the rate of business failures tripled, climbing from 37 failures to 120 failures per every 10,000 businesses. Businesses that avoided bankruptcy saw a 75% decline in profits.
Causes
Factors that economists have pointed to as potentially causing or contributing to the downturn include troops returning from the war, which created a surge in the civilian labor force and more unemployment and wage stagnation; a decline in agricultural commodity prices because of the post-war recovery of European agricultural output, which increased supply; tighter monetary policy to combat the postwar inflation of 1919; and expectations of future deflation that led to reduced investment.
End of World War I
Adjusting from war time to peacetime was an enormous shock for the U.S. economy. Factories focused on wartime production had to shut down or retool their production. A short
recession
In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...
occurring in the United States following
Armistice Day
Armistice Day, later known as Remembrance Day in the Commonwealth and Veterans Day in the United States, is commemorated every year on 11 November to mark the armistice signed between the Allies of World War I and Germany at Compiègne, Fran ...
was followed by a growth spurt. The recession that occurred in 1920, however, was also affected by the adjustments following the end of the war, particularly the demobilization of soldiers. One of the biggest adjustments was the re-entry of soldiers into the civilian labor force. In 1918, the Armed Forces employed 2.9 million people. This fell to 1.5 million in 1919 and 380,000 by 1920. The effects on the labor market were most striking in 1920, when the civilian labor force increased by 1.6 million people, or 4.1%, in a single year. (Though smaller than the numbers in post–World War II demobilization in 1946 and 1947, this is otherwise the largest documented one-year labor force increase).
In the early 1920s, both prices and wages changed more quickly than today. Employers may have been quicker to offer reduced wages to returning troops, hence lowering their production costs, and lowering their prices.
1918–1920 flu pandemic
The
Spanish flu
The 1918–1920 influenza pandemic, commonly known by the misnomer Spanish flu or as the Great Influenza epidemic, was an exceptionally deadly global influenza pandemic caused by the H1N1 influenza A virus. The earliest documented case was ...
pandemic in the United States began in spring 1918 and returned in waves into 1920, killing about 675,000 Americans. Because a large fraction of the deaths were among
working age
Working age is the range of ages at which people are typically engaged in either paid or unpaid work. It typically sits between the ages of adolescence and retirement
Retirement is the withdrawal from one's position or occupation or from one' ...
adults, the resulting economic dislocation was especially severe. Work by economists
Robert Barro
Robert Joseph Barro (born September 28, 1944) is an American macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. Barro is considered one of the founders of new classical macroeconomics, along with Robert Lucas, J ...
and Jose Ursua suggests that the flu was responsible for declines in gross domestic product of 6 to 8 percent worldwide between 1919 and 1921.
Labor unions
During World War I, labor unions had increased their power—the government had a great need for goods and services, and with so many young men in the military, there was a tight labor market. Following the war, however, there was a period of turmoil for labor unions, as they lost their bargaining power. In 1919, 4 million workers went on strike at some point, significantly more than the 1.2 million in the preceding years.
Major strikes included an
iron and steel workers strike in September 1919, a
bituminous coal miners strike in November 1919, and a major railroad strike in 1920. According to economist
J. R. Vernon, "By the spring of 1920, with unemployment rates rising, labor ceased its aggressive stance and labor peace returned."
Monetary policy
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and
Anna Schwartz
Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
, in ''
A Monetary History of the United States
''A Monetary History of the United States, 1867–1960'' is a book written in 1963 by Nobel Prize–winning economist Milton Friedman and Anna J. Schwartz. It uses historical time series and economic analysis to argue the then-novel proposition ...
'', consider mistakes in Federal Reserve policy as a key factor in the crisis. In response to post–World War I inflation the
Federal Reserve Bank of New York began raising interest rates sharply. In December 1919 the rate was raised from 4.75% to 5%. A month later it was raised to 6%, and in June 1920 it was raised to 7% (the highest interest rates of any period except the 1970s and early 1980s).
Deflationary expectations
Under the
gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
, a period of significant inflation of bank credit and paper claims would be followed by a wave of redemptions as depositors and speculators moved to secure their assets. This would lead to a deflationary period as bank credit and claims diminished and the money supply contracted in line with gold reserves. The introduction of the Federal Reserve System in 1913 had not fundamentally altered this link to gold. The economy had been generally inflationary since 1896, and from 1914 to 1920, prices had increased quickly. People and businesses thus expected prices to fall substantially.
Government response
![1921 recession, President's Conference on Unemployment](https://upload.wikimedia.org/wikipedia/commons/a/ab/1921_recession%2C_President%27s_Conference_on_Unemployment.jpg)
President
Woodrow Wilson
Thomas Woodrow Wilson (December 28, 1856February 3, 1924) was an American politician and academic who served as the 28th president of the United States from 1913 to 1921. A member of the Democratic Party, Wilson served as the president of ...
's slow response to the depression was criticized by those in the Republican party, catapulting them into the
White House
The White House is the official residence and workplace of the president of the United States. It is located at 1600 Pennsylvania Avenue NW in Washington, D.C., and has been the residence of every U.S. president since John Adams in 1800. ...
under the banner of
Warren Harding
Warren Gamaliel Harding (November 2, 1865 – August 2, 1923) was the 29th president of the United States, serving from 1921 until his death in 1923. A member of the Republican Party, he was one of the most popular sitting U.S. presidents. A ...
. Once in office, Harding convened a President's Conference on Unemployment at the instigation of then Commerce Secretary
Herbert Hoover
Herbert Clark Hoover (August 10, 1874 – October 20, 1964) was an American politician who served as the 31st president of the United States from 1929 to 1933 and a member of the Republican Party, holding office during the onset of the Gr ...
as a result of rising unemployment during the recession. About 300 eminent members of industry, banking, and labor were called together in September 1921 to discuss the problem of unemployment. Hoover organized the economic conference and a committee on unemployment. The committee established a branch in every state having substantial unemployment, along with sub-branches in local communities and mayors' emergency committees in 31 cities. The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments. President Harding signed the
Emergency Tariff of 1921
An emergency is an urgent, unexpected, and usually dangerous situation that poses an immediate risk to health, life, property, or environment and requires immediate action. Most emergencies require urgent intervention to prevent a worsening ...
and the
Fordney–McCumber Tariff
The Fordney–McCumber Tariff of 1922 was a law that raised American tariffs on many imported goods to protect factories and farms. The US Congress displayed a pro-business attitude in passing the tariff and in promoting foreign trade by providin ...
. Secretary of Treasury
Andrew Mellon
Andrew William Mellon (; March 24, 1855 – August 26, 1937), sometimes A. W. Mellon, was an American banker, businessman, industrialist, philanthropist, art collector, and politician. From the wealthy Mellon family of Pittsburgh, Pennsylva ...
also successfully pushed for lower income tax rates to help the recovery.
Interpretations
According to a 1989 analysis by
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
and
Anna Schwartz
Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
, the recession of 1920–1921 was the result of an unnecessary contractionary monetary policy by the
Federal Reserve Bank
A Federal Reserve Bank is a regional bank of the Federal Reserve System, the central banking system of the United States. There are twelve in total, one for each of the twelve Federal Reserve Districts that were created by the Federal Reserve ...
.
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
agrees that high interest rates due to the Fed's effort to fight inflation caused the problem. This did not cause a deficiency in aggregate demand but in aggregate supply. Once the Fed relaxed its monetary policy, the economy rapidly recovered.
Additionally,
Allan H. Meltzer
Allan H. Meltzer (; February 6, 1928 – May 8, 2017) was an American economist and Allan H. Meltzer Professor of Political Economy at Carnegie Mellon University's Tepper School of Business and Institute for Politics and Strategy in Pittsburgh, ...
suggests that since the U.S. was on the
gold standard
A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was the basis for the international monetary system from the 1870s to the early 1920s, and from the la ...
, the flight of gold from hyper-inflationary Europe to the U.S. raised the nominal stock of high-powered
base money
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This include ...
. This ended the deflation and contributed to the economic recovery.
James Grant discusses in his 2014 book, ''The Forgotten Depression, 1921,'' why the depression of 1920–1921 was relatively short compared to the 21st century's economic recession and the following economic downturn that started in 2007. "The essential point about the long ago downturn of 1920–1921 is that it was kind of the last demonstration of how a price mechanism works and the last governmentally unmediated business cycle downturn, meaning it was the last one that the government didn't attempt to treat with fiscal intervention with much lower interest rates. In fact, the FED, then still wet behind the ears as it only had been founded in 1914, actually raised rates in the face of a truly brutal deflation."
Thomas Woods
Thomas Ernest Woods Jr. (born August 1, 1972) is an American author and libertarian commentator who is currently a senior fellow at the Mises Institute.Naji FilaliInterview with Thomas E. Woods, Jr. Harvard Political Review, August 16, 2011. Wo ...
, a proponent of the
Austrian School
The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian schoo ...
, argues that President Harding's
laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...
economic policies during the 1920–1921 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence on the rapid and widespread private-sector recovery.
[Thomas Woods]
"Warren Harding and the Forgotten Depression of 1920"
''First Principles'' Journal. Woods argued that, as there were massive distortions in private markets due to government economic influence related to demands of World War I, an equally massive correction to the distortions needed to occur as quickly as possible to realign investment and consumption with the new peacetime economic environment.
In a 2011 article, Daniel Kuehn, a proponent of Keynesian economics, questions many of the assertions Woods makes about the 1920–1921 recession. Kuehn notes the following:
* the most substantial downsizing of government was attributable to the Wilson administration, and occurred well before the onset of the 1920–1921 recession.
* the Harding administration raised revenues in 1921 by expanding the tax base considerably at the same time that it lowered rates.
* Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920–1921 recession was not characterized by a deficiency in aggregate demand, fiscal stimulus was unwarranted.
United Kingdom
Britain initially enjoyed an economic boom between 1919–1920, as private capital pent-up over four years of war was invested into the economy.
The shipbuilding industry was flooded with orders to replace lost shipping (7.9 million tons worth of merchant shipping stock was destroyed during the war). However, by 1920, the British transition from a wartime to a peacetime economy faltered, and a serious recession struck the economy between 1920–1922. James Mitchell, Solomos Solomou and Martin Weale have estimated that GDP fell sharply by 22% between August 1920 and May 1921. They estimate that output did not exceed the 1920 level until the spring of 1924.
With other major economies also mired in recession, the export-dependent economy of Britain was particularly hard-hit. Unemployment reached 17%, with overall exports at only half of their pre-war levels.
See also
*
List of recessions in the United States
There have been as many as 48 recessions in the United States dating back to the Articles of Confederation, and although economists and historians dispute certain 19th-century recessions, the consensus view among economists and historians is that ...
References
Further reading
* Bordo, Michael D., and John Landon-Lane. "Exits from Recessions: The US Experience 1920–2007" . No. w15731. National Bureau of Economic Research, 2010
online*
* Leab, Daniel, ed. ''Encyclopedia of American Recessions and Depressions'' (2 vol ABC-CLIO, 2014).
*
* Nelson, Daniel. "'A Newly Appreciated Art:' The Development of Personnel Work at Leeds & Northrup, 1915–1923." ''Business History Review'' 44.4 (1970): 520–535.
* Newman, Patrick. "The depression of 1920–1921: a credit induced boom and a market based recovery?." ''Review of Austrian Economics'' 29.4 (2016): 387–414.
* Shaw, Christopher W. “'We Must Deflate': The Crime of 1920 Revisited." ''Enterprise & Society'' 17.3 (2016): 618-650
online
* Tallman, Ellis, and Eugene N. White. "Monetary Policy When One Size Does Not Fit All: the Federal Reserve Banks and the Recession of 1920–1921." ''Workshop on Monetary and Financial History Federal Reserve Bank of Atlanta and Emory University'' (2017)
online
*
*
External links
* Smiley, Gene.
US Economy in the 1920s. EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008.
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Recessions
Stock market crashes