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The depression of 1920–1921: a credit induced boom and a market based recovery?

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  • Patrick Newman

    (George Mason University)

Abstract

This paper examines the American post-WW1 boom and bust. It argues that the Federal Reserve’s monetary easing from 1919 to 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 natural 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

  • Patrick Newman, 2016. "The depression of 1920–1921: a credit induced boom and a market based recovery?," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 29(4), pages 387-414, December.
    • Handle: RePEc:kap:revaec:v:29:y:2016:i:4:d:10.1007_s11138-015-0337-5
    DOI: 10.1007/s11138-015-0337-5
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    2. Thomas L. Hogan & Daniel J. Smith, 2022. "War, money & economy: Inflation and production in the Fed and pre-Fed periods," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(1), pages 15-37, March.

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