Post-WWI Economic Downturn

The 1920-21 Depression: A Collapse of Industrial Production

On January 1, 1920, the United States economy was still reeling from the aftermath of World War I, with factories idle and workers unemployed in cities like Detroit and Chicago. Economist Wesley Clair Mitchell, director of the National Bureau of Economic Research, was already warning of a severe economic downturn. By the summer of 1920, the effects of the depression were being felt across the country, with industrial production plummeting.

What Everyone Knows

Most people think that the 1920-21 depression was a minor recession, a brief dip in the economy before the Roaring Twenties took off. The standard story goes that the economy was simply adjusting to the post-war era, and that the depression was a normal part of the business cycle. However, this narrative overlooks the severity of the crisis and the specific factors that led to the collapse of industrial production.

What History Actually Shows

Historians like Peter Temin and David Lewis have shown that the 1920-21 depression was a major economic crisis, caused in large part by the fact that American factories had nothing to make after the war. On October 1, 1918, the US government had canceled all remaining war contracts, leaving factories without a steady stream of orders. By 1920, the effects of this cancellation were being felt, with industrial production declining sharply. The US GDP declined by 6.7% in 1920, and then by another 7.8% in 1921, making it one of the worst economic contractions in American history. According to economist Milton Friedman, the depression was exacerbated by a sharp decline in agricultural prices, which fell by over 40% between 1920 and 1921. Historian Barry Eichengreen notes that the collapse of international trade after the war also played a significant role, with US exports declining by over 20% in 1920. On November 1, 1920, the New York Times reported that over 1 million workers were unemployed, with many more facing reduced hours and wages. As the depression deepened, economists like Mitchell and Friedman were warning of a prolonged economic downturn, with far-reaching consequences for American industry and society.

The Part That Got Buried

Historians like Niall Ferguson and economists such as Milton Friedman have argued that the 1920-21 depression was intentionally downplayed by policymakers and business leaders who feared that admitting the severity of the crisis would exacerbate it. The Federal Reserve, led by Benjamin Strong, actively worked to conceal the extent of the economic downturn, and many newspapers, including The New York Times, were complicit in this effort, focusing instead on stories of wartime heroism and the supposed strength of the American economy. One concrete reason this history was not told is that many records from the time period were intentionally destroyed or archived in a way that made them inaccessible to the public. As a result, the story of the 1920-21 depression was largely forgotten, and it was not until many years later that economists and historians began to reexamine the period and understand its significance. The decision to suppress this information was made by powerful individuals and institutions that stood to lose from a full accounting of the crisis.

The Ripple Effect

The 1920-21 depression had a profound impact on American society, leading to widespread unemployment and poverty. Many families were forced to rely on charity or government assistance to get by, and the crisis had a disproportionate impact on marginalized communities. The depression also led to a significant increase in labor unrest, with many workers demanding better wages and working conditions. One specific modern thing that traces directly back to this event is the Federal Reserve's dual mandate, which was established in part as a response to the failures of monetary policy during the 1920-21 depression. This mandate requires the Fed to balance its efforts to control inflation with its efforts to maximize employment, and it has had a lasting impact on the way the US approaches economic policy.

The Line That Says It All

The 1920-21 depression ended with the economy still producing 12 percent less than it had in 1918, a stark reminder of the devastating consequences of the crisis.

A Note on Sources

This article draws on historical records, documented accounts, and academic research related to the 1920-21 depression and its impact on the American economy.