Depression of 1920-1921 Deflationary Recession and Panic
The Depression of 1920–21 was an extremely sharp deflationary recession in the United States, shortly after the end of World War I. It lasted from January 1920 to July 1921. The extent of the deflation was not only large, but large relative to the accompanying decline in real product.
The New York panic of 1920-21 represents yet another example of British economic warfare. The illusion that the existence of the Federal Reserve System might serve as a barrier against new financial panics and depressions received a nasty knock with the immediate postwar depression of 1920, which was a co-production of the Bank of England and the New York Federal Reserve.
The British deliberately provoked this Wall Street panic and severe depression during a period of grave military tension between London and Washington occasioned by the naval rivalry of the US and UK. The British Bank Rate had been at 6% from November 1919 until April 15, 1920, when it was raised to 7%. The bust in Wall Street began in the late summer of 1920. The UK Bank Rate was lowered to 6.5% in April 1922, and it went down all the way to 3% by July, 1922.
The Federal Reserve, as usual, followed London’s lead, gradually escalating the discount rate to 7% in June, 1920 to detonate the bust, and descending to 6.5% about a year later. The argument used by the central bankers’ cabal to justify their extreme tight monetary policy was the climate of postwar inflation, speculation, expansion and the freeing of consumer demand that had been augmented up in wartime.
This depression lasted about two years and was quite sharp, with a New York composite index of transaction indices falling 13.7% for the sharpest contraction since 1879. In many other countries this was the fiercest depression on record. As Keynes later complained, the US recovered much more rapidly than the British, who scarcely recovered at all. For the rest of the inter-war period, the United Kingdom was beset by permanent depression.
The fact that this depression was brought on deliberately by the Norman-Strong duo is amply documented in their private correspondence. In December 1920, Strong and Norman agreed that the policy of making money dearer had been successful, though it would have been better six months earlier. They agreed, too, that deflation must be gradual — it was becoming now too rapid and they favored a small reduction in rates both in London and New York.
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