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The 1920s and the 1990s in Mutual Reflection

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  • Robert J. Gordon

Abstract

This paper develops a new analysis of the U. S. economy in the 1920s that is illuminated by contrasts with the 1990s, and it also re-examines the causes of the Great Depression. In both the 1920s and the 1990s the acceleration of productivity growth linked to the delayed effects of previously invented "general purpose technologies" stimulated an increase in fixed investment that became excessive and proved to be unsustainable, while the productivity acceleration helps to account for low inflation in both decades. The uncanny parallel of the stock market boom, bubble, and collapse in 1995-2001 as in 1924-1930, reminds us that business cycles emerge from the complex interplay of multiple factors, not just one. Common elements between the two decades are overshadowed by differences, including the much larger share of agricultural output in the 1920s, the weakness of farm prices throughout the decade, and the role of collapsing farm prices in the pervasive post-1929 downward shift in aggregate demand. Another partly related difference was a high volatility of inventory accumulation that reflected the larger share of agriculture and manufacturing in the economy of the 1920s. Failures of public policy in the 1920s included the absence of deposit insurance, the unit-banking regulations that prevented the diversification of financial risk across regions, and the low margin requirements that exacerbated swings in stock market prices. Further, the 1920s witnessed the advent of protectionism and the sharp curtailment of immigration. The stability of the American economy after the 2000-01 collapse of investment and the stock market proves that good public policy matters, going beyond the narrowly defined operations of monetary and fiscal policy. Such highly diverse policies as banking regulation, deposit insurance, margin rules, reduction of tariffs, and loose restrictions on immigration all combine to make today's American economy more stable and less fragile than in the 1920s.

Suggested Citation

  • Robert J. Gordon, 2005. "The 1920s and the 1990s in Mutual Reflection," NBER Working Papers 11778, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11778
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    References listed on IDEAS

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    1. David, Paul A, 1990. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review, American Economic Association, vol. 80(2), pages 355-361, May.
    2. Robert J. Gordon, 1986. "The American Business Cycle: Continuity and Change," NBER Books, National Bureau of Economic Research, Inc, number gord86-1, July.
    3. Dale W. Jorgenson & Kevin J. Stiroh, 2000. "Raising the Speed Limit: U.S. Economic Growth in the Information Age," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 125-236.
    4. Robert J. Gordon, 1997. "The Time-Varying NAIRU and Its Implications for Economic Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 11-32, Winter.
    5. R. A. Gordon, 1951. "Cyclical Experience in the Interwar Period: The Investment Boom of the Twenties," NBER Chapters,in: Conference on Business Cycles, pages 163-224 National Bureau of Economic Research, Inc.
    6. Nathan Balke & Robert J. Gordon, 1986. "Appendix B: Historical Data," NBER Chapters,in: The American Business Cycle: Continuity and Change, pages 781-850 National Bureau of Economic Research, Inc.
    7. Claudia Goldin & Lawrence F. Katz, 1998. "The Origins of Technology-Skill Complementarity," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 693-732.
    8. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The case of the missing productivity growth: or, does information technology explain why productivity accelerated in the United States but not the United Kingdom?," Working Paper Series WP-03-08, Federal Reserve Bank of Chicago.
    9. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
    10. Robert J. Gordon, 1982. "Why Stopping Inflation May Be Costly: Evidence from Fourteen Historical Episodes," NBER Chapters,in: Inflation: Causes and Effects, pages 11-40 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Germán Gutiérrez & Thomas Philippon, 2017. "Declining Competition and Investment in the U.S," NBER Working Papers 23583, National Bureau of Economic Research, Inc.
    2. Jinghai Zheng & Angang Hu & Arne Bigsten, 2009. "Potential output in a rapidly developing economy: the case of China and a comparison with the United States and the European Union," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 317-342.

    More about this item

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • N00 - Economic History - - General - - - General
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-

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