1921 recession
Encyclopedia
The Depression of 1920–21 was an extremely sharp deflationary recession
in the United States
, shortly after the end of World War I
. It lasted from January 1920 to July 1921. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.
A range of factors have been identified contributing to the depression, many relating to adjustments in the economy following the end of World War I
. There was a brief Post-World War I recession immediately following the end of the war which lasted for 7 months. The economy started to grow, though it had not yet completed all the adjustments in shifting from a wartime to a peacetime economy. Factors identified as potentially contributing to the downturn include: returning troops which created a surge in the civilian labor force, a decline in labor union strife, changes in fiscal and monetary policy, and changes in price expectations.
Following the end of the Depression of 1920-21, the Roaring Twenties
brought a period of sustained economic prosperity.
The recession lasted from January 1920 to July 1921, or 18 months, according to the National Bureau of Economic Research
. This was longer than most post-World War II recessions, but was shorter than recessions from 1910–12 and 1913-1914 (24 and 23 months respectively) and significantly shorter than the Great Depression
(132 months). Estimates for the decline in Gross National Product also vary. The U.S. Department of Commerce estimates GNP declined 6.9%, Nathan Balke and Robert J. Gordon
estimate a decline of 3.5%, and Christina Romer
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.
The recession of 1920–21 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. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War
. This is worse than any year during the Great Depression
(adding all the years of the Great Depression together, however, yields more severe 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
. The recession also saw 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
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 1873–79
, Recession of 1882–85
, Recession of 1893–94
and the recession of 1907–08
.)
Stocks fell dramatically during the recession. The Dow Jones Industrial Average
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
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.
, but this 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 a mere 380,000 by 1920. The impact on the labor market was 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 Post-World War II demobilization in 1946 and 1947, it is otherwise the largest documented one-year labor force increase). In the early 1920s, both prices and wages changed more quickly than today, and thus employers may have been quicker to offer reduced wages to returning troops, hence lowering their production costs, and lowering their prices.
and Anna Schwartz
, in A Monetary History of the United States, 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).
. Under the Gold Standard
, a period of inflation was necessarily followed by a period of deflation, because the supply of money could not change, and there would simply not be enough money to pay ever-higher prices. 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.
President Warren Harding convened a President's Conference on Unemployment at the instigation of then Commerce Secretary Herbert Hoover
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 Warren G. Harding
signed the Emergency Tariff of 1921
and the Fordney–McCumber Tariff which was supported by the Republican Party and conservatives and generally opposed by the Democratic Party and liberal progressives.
economists and historians argue that the 1921 recession was a necessary market correction, required to engineer the massive realignments required of private business and industry following the end of the War. Libertarian Austrian School
historian Thomas Woods
argues that President Harding's laissez-faire
economic policies during the 1920-21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery. Woods argued that, as there existed massive distortions in private markets due to government economic influence related to 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 peace-time economic environment.
Daniel Kuehn's recent research calls into question many of the assertions Woods makes about the 1920-21 recession. Kuehn argues that the most substantial downsizing of government was attributable to the Wilson administration, and occurred well before the onset of the 1920-21 recession. Kuehn states that the Harding administration raised revenues in 1921 by expanding the tax base considerably at the same time that it lowered rates. Kuehn also argues that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920-21 recession was not characterized by any aggregate demand deficiency, fiscal stimulus was unwarranted.
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, shortly after the end of World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
. It lasted from January 1920 to July 1921. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.
A range of factors have been identified contributing to the depression, many relating to adjustments in the economy following the end of World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
. There was a brief Post-World War I recession immediately following the end of the war which lasted for 7 months. The economy started to grow, though it had not yet completed all the adjustments in shifting from a wartime to a peacetime economy. Factors identified as potentially contributing to the downturn include: returning troops which created a surge in the civilian labor force, a decline in labor union strife, changes in fiscal and monetary policy, and changes in price expectations.
Following the end of the Depression of 1920-21, the Roaring Twenties
Roaring Twenties
The Roaring Twenties is a phrase used to describe the 1920s, principally in North America, but also in London, Berlin and Paris for a period of sustained economic prosperity. The phrase was meant to emphasize the period's social, artistic, and cultural dynamism...
brought a period of sustained economic prosperity.
Severity
| Economic data for 1920–21 recession | |||
|---|---|---|---|
| Production | Prices | Ratio | |
| 1920-21 (Commerce) | -6.9% | -18% | 2.6 |
| 1920-21 (Balke&Gordon) | -3.5% | -13% | 3.7 |
| 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 |
The recession lasted from January 1920 to July 1921, or 18 months, according to the National Bureau of Economic Research
National Bureau of Economic Research
The National Bureau of Economic Research is an American private nonprofit research organization "committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community." The NBER is well known for providing start and end...
. This was longer than most post-World War II recessions, but was shorter than recessions from 1910–12 and 1913-1914 (24 and 23 months respectively) and significantly shorter than the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
(132 months). Estimates for the decline in Gross National Product also vary. The U.S. Department of Commerce estimates GNP declined 6.9%, Nathan Balke and Robert J. Gordon
Robert J. Gordon
Robert James "Bob" Gordon is an American economist. He is the Stanley G. Harris Professor of the Social Sciences at Northwestern University. He is known for his work on productivity, growth, the causes of unemployment, and airline economics.-Education:...
estimate a decline of 3.5%, and Christina Romer
Christina Romer
Christina D. Romer 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 administration...
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.
The recession of 1920–21 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. The drop in wholesale prices was even more severe, falling by 36.8%, the most severe drop since the American Revolutionary War
American Revolutionary War
The American Revolutionary War , the American War of Independence, or simply the Revolutionary War, began as a war between the Kingdom of Great Britain and thirteen British colonies in North America, and ended in a global war between several European great powers.The war was the result of the...
. This is worse than any year during the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
(adding all the years of the Great Depression together, however, yields more severe 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 rate | ||
|---|---|---|
| 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 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
Full employment
In macroeconomics, full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so....
. The recession also saw 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
AT&T Inc. is an American multinational telecommunications corporation headquartered in Whitacre Tower, Dallas, Texas, United States. It is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services...
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
Victor Zarnowitz
Victor Zarnowitz was a leading scholar on business cycles, indicators, and forecast evaluation. Dr. Zarnowitz was Senior Fellow and Economic Counselor to The Conference Board...
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 1873–79
Long Depression
The Long Depression was a worldwide economic crisis, felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. At the time, the episode was labeled the Great...
, Recession of 1882–85
Panic of 1884
The Panic of 1884 was a panic during the Recession of 1882-85. Gold reserves of Europe were depleted and the New York City national banks, with tacit approval of the United States Treasury Department, halted investments in the rest of the United States and called in outstanding loans. A larger...
, Recession of 1893–94
Panic of 1893
The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...
and the recession of 1907–08
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...
.)
Stocks fell dramatically during the recession. The Dow Jones Industrial Average
Dow Jones Industrial Average
The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...
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
Panic of 1907
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...
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, a decline in labor union strife, a shock in agricultural commodity prices, tighter monetary policy, expectations of deflation.End of World War I
Adjusting from war time to peace time was an enormous shock for the U.S. economy. Factories focused on war time production had to shut down or retool their production. A short Post-World War I recession occurred in the United States following Armistice DayArmistice Day
Armistice Day is on 11 November and commemorates the armistice signed between the Allies of World War I and Germany at Compiègne, France, for the cessation of hostilities on the Western Front of World War I, which took effect at eleven o'clock in the morning—the "eleventh hour of the eleventh day...
, but this 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 a mere 380,000 by 1920. The impact on the labor market was 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 Post-World War II demobilization in 1946 and 1947, it is otherwise the largest documented one-year labor force increase). In the early 1920s, both prices and wages changed more quickly than today, and thus employers may have been quicker to offer reduced wages to returning troops, hence lowering their production costs, and lowering their prices.
Labor unions
During World War I, labor unions had increased their power—the government had 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, however, "By the spring of 1920, with unemployment rates rising, labor ceased its aggressive stance and labor peace returned."Monetary policy
Milton FriedmanMilton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...
and Anna Schwartz
Anna Schwartz
Anna Jacobson Schwartz is an economist at the National Bureau of Economic Research in New York City, and according to Paul Krugman "one of the world's greatest monetary scholars"...
, in A Monetary History of the United States, 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
Federal Reserve Bank of New York
The Federal Reserve Bank of New York is one of the 12 Federal Reserve Banks of the United States. It is located at 33 Liberty Street, New York, NY. It is responsible for the Second District of the Federal Reserve System, which encompasses New York state, the 12 northern counties of New Jersey,...
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
With the creation of the Federal Reserve in 1913, the United States no longer maintained gold reserves backing each US dollar. The general population, however, was not yet familiar with fiat moneyFiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
. Under the Gold Standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, a period of inflation was necessarily followed by a period of deflation, because the supply of money could not change, and there would simply not be enough money to pay ever-higher prices. 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
Herbert Hoover
Herbert Clark Hoover was the 31st President of the United States . Hoover was originally a professional mining engineer and author. As the United States Secretary of Commerce in the 1920s under Presidents Warren Harding and Calvin Coolidge, he promoted partnerships between government and business...
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 Warren G. Harding
Warren G. Harding
Warren Gamaliel Harding was the 29th President of the United States . A Republican from Ohio, Harding was an influential self-made newspaper publisher. He served in the Ohio Senate , as the 28th Lieutenant Governor of Ohio and as a U.S. Senator...
signed the Emergency Tariff of 1921
Emergency Tariff of 1921
The Emergency Tariff of 1921 of the United States was enacted on May 27, 1921. Due to the Underwood Tariff passed during the Wilson Administration, Republican leaders in the United States Congress rushed to create a temporary measure to ease the plight of farmers until a better solution could be...
and the Fordney–McCumber Tariff which was supported by the Republican Party and conservatives and generally opposed by the Democratic Party and liberal progressives.
Interpretations of the end
Austrian SchoolAustrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
economists and historians argue that the 1921 recession was a necessary market correction, required to engineer the massive realignments required of private business and industry following the end of the War. Libertarian Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
historian Thomas Woods
Thomas Woods
Thomas E. "Tom" Woods, Jr. is an American historian, economist, political analyst, and New York Times-bestselling author. He has written extensively on the subjects of American history, contemporary politics, and economic theory...
argues that President Harding's laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
economic policies during the 1920-21 recession, combined with a coordinated aggressive policy of rapid government downsizing, had a direct influence (mostly through intentional non-influence) on the rapid and widespread private-sector recovery. Woods argued that, as there existed massive distortions in private markets due to government economic influence related to 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 peace-time economic environment.
Daniel Kuehn's recent research calls into question many of the assertions Woods makes about the 1920-21 recession. Kuehn argues that the most substantial downsizing of government was attributable to the Wilson administration, and occurred well before the onset of the 1920-21 recession. Kuehn states that the Harding administration raised revenues in 1921 by expanding the tax base considerably at the same time that it lowered rates. Kuehn also argues that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920-21 recession was not characterized by any aggregate demand deficiency, fiscal stimulus was unwarranted.
External links
- Business Cycles and Unemployment, introduction by Herbert Hoover, Secretary of Commerce, published in 1923.
- THE LONG-RANGE PLANNING OF PUBLIC WORKS, by Otto T. Mallery, Member of the Pennsylvania State Industrial Board, 1923
- "Wage Adjustment and Aggregate Supply in the Depression of 1920-1921: Extending the Bernanke-Carey Model," by Bryan Caplan
- Smiley, Gene. "US Economy in the 1920s". EH.Net Encyclopedia, edited by Robert Whaples. March 26, 2008.
- Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression," Journal of Economic History (1966) 26: 223-238.