The unprecedented death and destruction of the First World War leveled the economies of the world, but the situation was different in the United States.
In fact, 1914 to 1918 were mainly years of prosperity for the United States, with the federal government injecting money into the war economy. Previously a debtor country, the United States emerged from the war as the chief lender and arguably the strongest and most dynamic economy in the world.
But even this boom in war does not fully explain what happened next. Somehow, despite a global flu pandemic that killed 675,000 Americans in 1918 and 1919, and a depression that ransacked the economy in 1920 and 1921, the United States not only recovered but have entered a decade of unprecedented growth and prosperity. The Americans have started a spending spree: the Roaring Twenties were launched.
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The Federal Reserve, established in 1913, weakened its monetary policy muscles for the first time during the First World War. Since the American public was unwilling to finance the war effort through taxes, the Fed did so by printing more money. In 1918, the result was runaway inflation. A pair of shoes that used to cost $ 3 before the war now costs $ 10 or $ 12.
Economists have predicted a post-war crash as orders for military factories dry up after the 1918 armistice. The end of the war economy has been compounded by the spread of the so-called “Spanish flu” , a virulent contagion that not only killed hundreds of thousands of Americans from the fall of 1918 to the spring of 1919, but closed businesses from coast to coast. .
Incredibly, the terrible post-war economic forecasts have not come true. At least not immediately. American consumers, who had patriarchically cut and saved during the war, began to experience it. Europeans also participated, buying $ 8 billion in US exports. Inflation soared, as did prices, but consumers were willing to pay anything to enjoy freedom.
“Instead of the widely anticipated deflationary crisis, the economy experienced an inflationary boom, and everyone died,” says James Grant, the author of The forgotten depression: 1921: the crash that healed. “The inevitable happened, but it didn’t happen on time.”
To combat the spike in inflation, the Fed continued to raise its discount interest rate to make borrowing more expensive. By 1920, the interest rate had reached 7%, what Grant calls “horribly high.”
While the Fed had the right idea, the timing was not right. The surprise post-war inflation bubble was about to burst. Sector by sector, market by market, prices began to fall as once exuberant consumer demand dried up. And with very high interest rates, companies couldn’t afford to borrow money to stay afloat.
Grant argues that the Fed could absolutely have intervened by cutting interest rates, and that Congress could have adopted big stimulus packages to support failing industries, but instead, US leaders have chosen to let it go -to do.
Benjamin Strong, the influential governor of the Federal Reserve Bank of New York at the time, was perceptive in predicting what inaction would do to the economy.
“I believe that this period will be accompanied by a considerable unemployment rate, but not for very long,” he wrote in February 1919. “And that after a year or two of discomfort, embarrassment, losses , from troubles caused by unemployment, we will emerge with an almost invincible banking position … and we will be able to exert a large and important influence to bring the world back to normal and livable condition. “
And this is precisely what happened. The depression of 1920 and 1921 lasted 18 months, what Grant calls a “brutally hard, but very effective depression.” The stock market has lost almost half its value, unemployment has reached 19% and countless companies have gone bankrupt, including Truman & Jacobson, a Kansas City men’s clothing store co-owned with future President Harry Truman.
The bitter economic pill prescribed by Strong worked as expected and prices fell. And in 1921, the new Secretary of the Treasury, the wealthy industrialist Andrew Mellon, urged the Fed to finally lower interest rates.
With deflated prices for goods and lower borrowing costs, “the country was on sale,” says Grant. Foreign investors have flooded the economy with gold and this has provided the capital to kick-start the domestic game.
“Free markets were their own flagship,” says Grant. “Gold rushed into the country to take advantage of the coming boom, and of course there was a boom, and the 1920s really roared.”
The Roaring Twenties deserve its name: the US economy grew 42% between 1921 and 1929. But economic historians argue that the factors that made the decade so profitable were less an anomaly than a return to the normal.
Even the greatest technological advances of the 1920s – the widespread electrification of homes and factories, the introduction of household appliances such as refrigerators and washing machines, the rapid adoption of the automobile, the growth of stations. commercial radio and cinemas – were in development before the start of the First World War. the “pause” button.
“The war may have accelerated the development of aircraft, but in general by the 1920s you returned to normal economic growth and a normal economic cycle,” said Hugh Rockoff, professor of economic history at Rutgers University.
Much of the rising wealth of the 1920s was built on a fragile base of easy credit and stock market speculation. The same laissez-faire philosophy governing the economic ship in 1921 failed to avoid the stock market crash of 1929 and prevent unregulated American banks from collapsing.
After a great expiration after the war and the pandemic, the Americans have now Great Depression.
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