The Depression of 1920–1921: An Austrian Myth

The Austrians and other libertarians frequently assert that America had a depression from 1920 to 1921. That is simply not true if one accepts the estimates of (1) Romer or (2) Balke and Gordon.

The generally accepted definition of a depression is a real GNP/GDP contraction of 10% or more - or, in other words, where the real (inflation-adjusted) value of national output falls by 10% or more. In past estimates of the fall in national output, such as the official Commerce Department data (based on the Kuznets-Kendrick series), GNP fell 8% between 1919 and 1920 and 7% between 1920 and 1921 (Romer 1988: 108). But that data has been challenged, and acceptance of it also shows numerous and long depressions in the 19th century, depressions that did not end quickly – data which hardly supports the Austrian apologetics for gold standard capitalism. In fact, if the Austrians really wish to accept the data from the Kuznets-Kendrick series, then that entails that gold standard capitalism was hit by numerous and frequent recessions and depressions, and sometimes very long ones. Other Austrians are of course aware of the most recent GNP estimates, and press these into service to show that the 19th century US business cycle was less volatile than in Kuznets-Kendrick or the Commerce Department data. But you cannot have it both ways: either (1) the Kuznets-Kendrick series is valid or (2) better data is available in Romer (1988) or Balke and Gordon (1989).

What do the most recent GNP estimates show?

First, we can cite Romer’s estimates for GNP here (I have added the annual growth rates by my own calculation):

Year | GNP* | Growth Rate
1914 | $414.599
1915 | $443.048 | 6.86%
1916 | $476.498 | 7.54%
1917 | $473.896 | -0.54%
1918 | $498.458 | 5.18%
1919 | $503.873 | 1.08%
1920 | $498.132 | -1.13%
1921 | $486.377 | -2.35%
1922 | $514.949 | 5.87%
1923 | $583.105 | 13.23%
* Billions of 1982 dollars
(Romer 1989: 23).

The figures show a GNP contraction of 3.47% from 1919 to 1921, a recession that was less severe than the contraction of 1908 by Romer’s figures, and much lower than the 10% figure needed to declare a depression. Romer concludes that the “growth path of output was hardly impeded by the recession” (Romer 1988: 108–112), and the positive supply shocks that resulted from the resumption in international trade after WWI actually benefited certain sectors of the US economy (Romer 1988: 111).

Secondly, the estimates for GNP of Balke and Gordon are here (I have added the annual growth rates by my own calculation):

Year | GNP* | Growth Rate
1914 | $402.4 |
1915 | $417.3 | 3.70%
1916 | $485.0 | 16.2%
1917 | $484.9 | -0.02%
1918 | $522.2 | 7.69%
1919 | $507.1 | -2.89%
1920 | $496.3 | -2.12%
1921 | $478.8 | -3.52%
1922 | $513.2 | 7.18%
1923 | $585.0 | 13.99%
1924 | $600.5 | 2.64%
* Billions of 1982 dollars
(Balke and Gordon 1989: 84–85).

These figures show a GNP decline of 5.58% from 1920–1921. That was a severe recession, but hardly a depression.

If we include the contraction at the end of First World War in 1919, the GNP contraction was 8.31% from the wartime GNP peak of 1918 to 1921, but that figure is misleading, as it includes the contraction that appears in Balke and Gordon’s estimates that was caused by the dismantling of America’s wartime economy. Curiously, no such contraction for 1919 appears in Romer’s data. According to the offical data the business cycle ran through these phases in these years:

August 1918–March 1919, severe depression from the end of wartime production;
April 1919-December 1919, expansion;
January 1920-July 1921, recession.

US Business Cycle Expansions and Contractions, National Bureau of Economic Research.

All in all, there was no depression in 1920–1921. There was no financial crisis, and no mass bank failures as in 1929–1933. This was a recession of an entirely different order from that of 1893–1894, 1907–1908 or 1929–1933 (a useful paper on the differences between the 1920-1921 and 1929-1933 contractions in the neoclassical literature can be found in Gertler 2000, a response to Cole and Ohanian, 2000).

BIBLIOGRAPHY

Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.

Cole, H. L. and L.E. Ohanian, 2000. “Re-examining the Contributions of Money and Banking Shocks to the U.S. Great Depression,” in B. S. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, MIT Press, Cambridge, MA. 183-226.

Gertler, M. 2000. “Comment,” in B. S. Bernanke and K. Rogoff (eds.), NBER Macroeconomics Annual 2000, MIT Press, Cambridge, MA. 237-257.

Romer, C. D. 1989. “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy 97.1: 1–37.