1920 depression

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Depression of 192021

From Wikipedia, the freeencyclopedia

A 1919 parade inMinneapolis for

soldiers returning

home after

World War I.The upheaval
http://en.wikipedia.org/wiki/File:Returning_from_World_War_I.jpg


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associated with

the transitionfrom a wartime

to peacetime

economy

contributed to adepression in

1920 and 1921.

The Depression of 192021 was an extremely

sharp deflationaryrecessionin the United States, shortly

after the end ofWorld War I.It lasted from January 1920to July 1921.

[1]The extent of
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the deflation was not only

large, but large relative to theaccompanying decline in realproduct.

[2]

A range of factors have been

identified contributing to thedepression, many relating toadjustments in the economyfollowing the end ofWorldWar I. There was abriefPost-World War Irecession immediately

following the end of the warwhich lasted for 7 months.The economy started to
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grow, though it had not yet

completed all theadjustments in shifting froma wartime to a peacetimeeconomy. Factors identified

as potentially contributing tothe downturn include:returning troops whichcreated a surge in the civilian

labor force, a decline in laborunion strife, changes in fiscaland monetary policy, andchanges in priceexpectations.


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Following the end of the

Depression of 192021,the RoaringTwenties brought a period ofeconomic prosperity.

Contents

1 Overview

2 Causes

o

2.1 End of World War Io 2.2 Labor unions

o 2.3 Monetary policy

o 2.4 Deflationary expectations

3 Government response

4 Interpretations of the end
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5 See also

6 References7 External links

[edit]Overview

Economic data for 1920

21recession

[2][3][4]

Estimate Product

ion

Pric

es

Rat

io1920-21

(Commerce

)

-6.9% -

18%

2.6

1920-21

(Balke&Gor

-3.5% -

13%

3.7
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don)

1920-21(Romer)

-2.4% -14.8

%

6.3

1929-30 -8.6% -2.5

%

0.3

1930-31 -6.5% -8.8

%

1.4

1931-32 -13.1% -

10.3

%

0.8


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The recession lasted from

January 1920 to July 1921,or 18 months, according tothe National Bureau ofEconomic Research. This

was longer than most post-World War II recessions, butwas shorter than recessionsfrom 191012 and 1913-

1914 (24 and 23 monthsrespectively) andsignificantly shorter thanthe Great Depression (132months).[1][5]Estimates for thedecline in Gross National
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Product also vary. The U.S.

Department ofCommerce estimates GNPdeclined 6.9%, Nathan Balkeand Robert J.

Gordon estimate a decline of3.5%, and ChristinaRomerestimates a decline of2.4%.

[2][6]There is no formal

definition ofeconomicdepression, but two informalrules are a 10% decline inGDP or a recession lastingmore than three years.[7]
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The recession of 192021

was characterized byextreme deflation thelargest one-year percentagedecline in around 140 years

of data.[2]

The Department ofCommerce estimates 18%deflation, Balke and Gordonestimate 13% deflation, and

Romer estimates 14.8%deflation. The drop inwholesale prices was evenmore severe, falling by36.8%, the most severe dropsince theAmerican
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Revolutionary War. This is

worse than any year duringthe GreatDepression (adding all theyears of the Great

Depression together,however, yields more severedeflation). The deflation of192021 was extreme in

absolute terms, and alsounusually extreme given therelatively small decline ingross domestic product.

[2]

Unemployment rate[8]
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Year Lebergott Romer

1919 1.4% 3.0%

1920 5.2% 5.2%

1921 11.7% 8.7%

1922 6.7 6.9%

1923 2.4 4.8%

Unemployment rose sharplyduring the recession. Romerestimates a rise to 8.7% from5.2% and an older estimatefrom Stanley Lebergott saysunemployment rose from


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5.2% to 11.7%. Both agree

that unemployment quicklyfell after the recession, andby 1923 had returned to alevel consistent with full

employment.[8]

Therecession also saw anextremely sharp decline inindustrial production. From

May 1920 to July 1921,automobile productiondeclined by 60% and totalindustrial production by30%.[9] At the end of therecession, production quickly
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rebounded. Industrial

production returned to itspeak levels by October 1922.TheAT&T Index of IndustrialProductivity showed a

decline of 29.4%, followed byan increase of 60.1% bythis measure, the recessionof 192021 had the most

severe decline and mostrobust recovery of anyrecession between 1899 andthe GreatDepression.[10] Using avariety of indexes, Victor
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Zarnowitz found the

recession of 192021 tohave the largest drop inbusiness activity of anyrecession between 1873 and

the Great Depression. (Bythis measure, Zarnowitzfinds the recession to be onlyslightly larger than

the Recession of 187379, Recession of 188285, Recession of 189394 and the recession of190708.)[10]
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The Dow Jones IndustrialAverage from January 1918to January 1923. The indexpeaked at 119.6 on

November 3, 1919 andbottomed at 63.9 on August24, 1921, a decline of 47%.

Stocks fell dramaticallyduring the recession.The Dow Jones Industrial
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Average reached a peak of

119.6 on November 3, 1919,two months before therecession began. The marketbottomed on August 24,

1921, at 63.9, a decline of47% (by comparison, theDow fell 44% duringthe Panic of 1907 and 89%

during the GreatDepression).

[11]The climate

was terrible for businessesfrom 1919 to 1922 the rate ofbusiness failures tripled,climbing from 37 failures to
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120 failures per every 10,000

businesses. Businesses thatavoided bankruptcy saw a75% decline in profits.

[9]

[edit]Causes

Factors that economistshave pointed to as potentiallycausing or contributing to the

downturn include: troopsreturning from the war whichcreated a surge in the civilianlabor force, a decline in labor

union strife, a shock inagricultural commodityprices, tighter monetary
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policy, expectations of

deflation.

[2]

[edit]End of World War I

Adjusting from war time topeace time was an

enormous shock for the U.S.economy. Factories focusedon war time production hadto shut down or retool theirproduction. A short Post-World War Irecession occurred in the

United StatesfollowingArmistice Day, butthis was followed by a
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growth spurt. The recession

that occurred in 1920,however, was also affectedby the adjustments followingthe end of the war,

particularly thedemobilization of soldiers.One of the biggestadjustments was the re-entry

of soldiers into the civilianlabor force. In 1918, the

Armed Forces employed 2.9million people. This fell to 1.5million in 1919 and a mere380,000 by 1920. The impact


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on the labor market was

most striking in 1920, whenthe civilian labor forceincreased by 1.6 millionpeople, or 4.1%, in a single

year (though smaller thanPost-World War IIdemobilization in 1946 and1947, it is otherwise the

largest documented one-year labor forceincrease).

[2]In the early

1920s, both prices andwages changed more quicklythan today, and thus
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employers may have been

quicker to offer reducedwages to returning troops,hence lowering theirproduction costs, and

lowering their prices.[2]

[edit]Labor unions

During World War I, laborunions had increased theirpowerthe government hadgreat need for goods andservices, and with so many

young men in the military,there was a tight labormarket. Following the war,
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however, there was a period

of turmoil for labor unions, asthey lost their bargainingpower. In 1919, 4 millionworkers went on strike at

some point, significantlymore than the 1.2 million inthe preceding years.

[2]Major

strikes included an iron and

steel workers strike inSeptember 1919, abituminous coal miners strikein November 1919 and amajor railroad strike in 1920.

According to economist J.R.
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Vernon, however, "By the

spring of 1920, withunemployment rates rising,labor ceased its aggressivestance and labor peace

returned."[2]

[edit]Monetary policy

Milton Friedman andAnnaSchwartz, in A MonetaryHistory of the United States,consider mistakes in FederalReserve policy as a key

factor in the crisis. Inresponse to post-World WarI inflation the Federal
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Reserve Bank of New

York began raising interestrates sharply. In December1919 the rate was raisedfrom 4.75% to 5%. A month

later it was raised to 6% andin June 1920 it was raised to7% (the highest interestrates of any period except

the 1970s and early 1980s).[edit]Deflationaryexpectations

Under the Gold Standard, aperiod of significant inflationof bank credit and paper
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claims would be followed by

a wave of redemptions asdepositors and speculatorsmoved to secure theirassets. This would lead to a

deflationary period as bankcredit and claims diminishedand the money supplycontracted in line with gold

reserves. The introduction ofthe Federal Reserve Systemin 1913 had notfundamentally altered thislink to gold.[12] The economyhad been generally
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inflationary since 1896, and

from 1914 to 1920, priceshad increased quickly.People and businesses thusexpected prices to fall

substantially.[2]

[edit]Government response

Representatives attendingthe 1921 Conference onUnemployment heldinWashington, D.C.

President WarrenHarding convened a
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President's Conference on

Unemployment at theinstigation of thenCommerce SecretaryHerbertHooveras a result of rising

unemployment during therecession. About 300eminent members ofindustry, banking and labor

were called together inSeptember 1921 to discussthe problem ofunemployment. Hooverorganized the economicconference and a committee
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on unemployment. The

committee established abranch in every state havingsubstantial unemployment,along with sub-branches in

local communities andmayors' emergencycommittees in 31 cities. Thecommittee contributed relief

to the unemployed, and alsoorganized collaborationbetween the local andfederal governments.President Warren G.Harding signed
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theEmergency Tariff of

1921 and the FordneyMcCumber Tariffwhich wassupported by the RepublicanParty and conservatives and

generally opposed by theDemocratic Party and liberalprogressives.

[edit]Interpretations of theend

Some economists andhistorians argue that the

1921 recession was anecessary market correction,required to engineer the
http://en.wikipedia.org/wiki/Emergency_Tariff_of_1921http://en.wikipedia.org/wiki/Emergency_Tariff_of_1921http://en.wikipedia.org/wiki/Fordney%E2%80%93McCumber_Tariffhttp://en.wikipedia.org/wiki/Fordney%E2%80%93McCumber_Tariffhttp://en.wikipedia.org/wiki/Fordney%E2%80%93McCumber_Tariffhttp://en.wikipedia.org/w/index.php?title=Depression_of_1920%E2%80%9321&action=edit&section=8http://en.wikipedia.org/w/index.php?title=Depression_of_1920%E2%80%9321&action=edit&section=8http://en.wikipedia.org/wiki/Fordney%E2%80%93McCumber_Tariffhttp://en.wikipedia.org/wiki/Fordney%E2%80%93McCumber_Tariffhttp://en.wikipedia.org/wiki/Emergency_Tariff_of_1921http://en.wikipedia.org/wiki/Emergency_Tariff_of_1921


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massive realignments

required of private businessand industry following theend of the War.Historian Thomas

Woods argues that PresidentHarding's laissez-faire economic policiesduring the 1920-21

recession, combined with acoordinated aggressivepolicy of rapid governmentdownsizing, had a directinfluence (mostly throughintentional non-influence) on
http://en.wikipedia.org/wiki/Thomas_Woodshttp://en.wikipedia.org/wiki/Thomas_Woodshttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Thomas_Woodshttp://en.wikipedia.org/wiki/Thomas_Woods


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the rapid and widespread

private-sectorrecovery.[13]

Woods arguedthat, as there existedmassive distortions in private

markets due to governmenteconomic influence relatedto World War I, an equallymassive "correction" to the

distortions needed to occuras quickly as possible torealign investment andconsumption with the newpeace-time economicenvironment.
http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321#cite_note-Woods_causes-13http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321#cite_note-Woods_causes-13


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Daniel Kuehn's recent

research calls into questionmany of the assertionsWoods makes about the1920-21 recession.

[14]Kuehn

argues that the mostsubstantial downsizing ofgovernment was attributableto the Wilson administration,

and occurred well before theonset of the 1920-21recession. Kuehn notes thatthe Harding administrationraised revenues in 1921 byexpanding the tax base


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considerably at the same

time that it lowered rates.Kuehn also argues thatWoods underemphasizes therole the monetary stimulus

played in reviving thedepressed economy andthat, since the 1920-21recession was not

characterized by a deficiencyin aggregate demand, fiscalstimulus was unwarranted.Economist Paul Krugman,who is critical of the Austrianinterpretation, notes that the


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monetary base expanded

significantly from 1922-1925,and that this expansion wasaccompanied by a reductionin commercial paper

rates.[15]

Allan Metzgersuggests that deflation andthe flight of gold from hyper-inflationary Europe to the

U.S. also contributed to therising real money stock andeconomic recovery

1920 depression

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