The Depression of 1920-1921: A Credit Induced Boom and a Market Based Recovery?

50 Pages Posted: 30 Jun 2015 Last revised: 5 Feb 2017

Date Written: December 5, 2015

Abstract

This paper examines the American post-WW1 boom and bust. It finds that the Federal Reserve’s monetary easing from 1919-1920 created an Austrian Business Cycle (ABC), or an unsustainable credit boom. The collapse of the boom initiated the Depression of 1920-1921. The subsequent laissez faire policy promoted a swift recovery. In particular, the recovery began following a severe liquidation of firms, reallocation of resources, and wage cuts stimulated by fiscal and monetary contraction. Contrary to some other accounts, we find that significant recovery began before the Federal Reserve’s 1921-1922 monetary easing affected the economy. We also address other criticisms of the credit-cycle interpretation.

Suggested Citation

Newman, Patrick, The Depression of 1920-1921: A Credit Induced Boom and a Market Based Recovery? (December 5, 2015). Review of Austrian Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2624357 or http://dx.doi.org/10.2139/ssrn.2624357

Patrick Newman (Contact Author)

Florida Southern College ( email )

Lakeland, FL 33801
United States

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