More on the 1920-1921 Depression

Saturday, Apr 25, 2009

When production fell more than in the first parts of the Great Depression, unemployment reached ~12%, the government did nearly nothing, and we were out in a few years, ushering in the Roaring Twenties...

In one crucial respect, the depression of 1920-21 was actually more severe than the Great Depression itself: there was a rapid decline in the price level of between forty and fifty percent within the course of a single year.  As Friedman and Schwartz (1963) explain, “From their peak in May [1920], wholesale prices declined moderately for a couple of months, and then collapsed.  By June 1921, they had fallen to 56 per cent of their level in May 1920.  More than three-quarters of the decline took place in the six months from August 1920 to February 1921.  This is, by all odds, the sharpest price decline covered by our money series, either before or since that date and perhaps also in the whole history of the United States.” (1963, pp.232-233.)  The wholesale price index during the Great Depression took about three years to fall by the same amount.

Employment and output were however not as severely affected as in the Great Depression.  Of course precise unemployment data are not available for this period, but one representative estimate (Lebergott, 1957) puts civilian unemployment at 2.3% in 1919, 11.9% in 1921, and back to 3.2% in 1923.  Output figures tell a similar story: one aggregate index (Mills, 1932) indexes production at 125.3 in 1919, 99.7 in 1921, and rebounding to 145.3 in 1923.  As these stylized facts indicate, the second unusual feature of the depression of 1920-21 was the rapid recovery in employment and output, in sync with a swift adjustment of the real wage to its new equilibrium position.


Overall, the Bernanke-Carey framework seems to highlight some interesting contrasts between the Great Depression and the depression of 1920-21.  Despite some extraordinary shocks, the American economy swiftly recovered from the depression of 1920-21.  In contrast, the recovery of the American and the world economies from the Great Depression was extremely slow.  This would lead us to strongly suspect that wage flexibility during the depression of 1920-21 was markedly greater than during the Great Depression, and this impression is strongly confirmed within the Bernanke-Carey framework of this paper.

Wage Adjustment and Aggregate Supply in the Depression of 1920-1921: Extending the Bernanke-Carey Model, Bryan Caplan, Professor of Economics, Princeton University, November 09, 1994,