1. The Great Depression … of 1921
ECO 473 – Money & Banking
Dr. D. Foster

2. The Great Depression of 1920-1921
Was it necessary?
Yes – the inevitable cost of wartime inflation:
Fed accommodates Treasury & buys bonds.
Consumer prices:  11% in 1916
 17% in 1917
 18.6% in 1918
on a pace to  14% in 1919
Yes – the cost of transitioning back to peace:
Federal budget: $2 billion in 1917
$18 billion in 1919
$5 billion in 1920
$3 billion in 1921

3. The Great Depression of 1920-1921
How did it unfold?
Fed policy (individual Reserve Banks):
Nov. 1919, NYF raises i (discount) to 4.75%
Jan. 1920, NYF raises i to 6%
June 1920, NYF raises i to 7%
May 1921, Fed banks lower i to 6.5%, 6%
It was a depression:
Real output fell an est. 9%
Unemployment rose to an est. 19%
Industrial production down 31%
Corporate profits down 92%
Prices down an est. 20%

4. The Great Depression of 1920-1921
What did government do?
Presidents ignored the depression
Wilson – stroke; League of Nations
Harding – not the government’s place
Congress  spending & balanced budget
Grant: “The last …”
The real recovery of 1922:
Industrial production rose +26%
Mfg. employment rose from 8.2 mill. to 9 mill
Increased income, profits, confidence

5. 2008
1981
1920

6. Lessons from the “Forgotten” Depression
“There hasn’t been a recovery since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.”

7. Lessons from the “Forgotten” Depression?
Keep wages from falling
Keep prices stable

8. The 1920s: Aftermath of the Great Depression
What happened in the 1920s?
Increased auto ownership.
The country became increasingly electrified.
Increased income.
Stock market boom.
Problem areas:
wheat, coal
What precipitated the Great Depression?
Failure to maintain the gold standard.
Collapse of sound monetary policy.

9. Stress on the Gold Standard
The Gold Exchange Standard
U.S. monetary policy is erratic:
lowers i (3.5%) and gold flows out.
raises i to stop gold outflows.
By Sept. 1929, i up to 6%; gold inflows 1929/1930.
After crash, i lowered; down to 1.5% in April 1931.
Gold outflows 1931; raised i to 3.5%.
March 1932 Fed begins OMO which stops deflation.
OMO stop in July 1932.
Devaluation concerns drive gold outflow Jan-Mar 1933.

10. Why did the depression last until 1932?
Herbert Hoover
Commerce Secretary in the 1920s.
Rallied business leaders in 1922.
Believed solution was to maintain wages & prices.
How a Depression becomes “Great”
Smoot-Hawley tariffs kick off trade war (1930).
Congress increases taxes to cover deficits (1932).
Hoover’s policy erodes business profits and raises unemployment.
Banks fail en masse in
Why didn’t it end?

11. The Great Depression … of 1921
ECO 473 – Money & Banking
Dr. D. Foster

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