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Remembering America’s Forgotten Depression of 1920-1921

Before the Great Depression, the U.S. went through an economic depression following the First World War. What happened?

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In two decades, the United States suffered two economic depressions. While the Great Depression has become common knowledge in American history, the 1920-1921 depression is hardly discussed. This was an 18-month downturn that occurred soon after the end of the First World War, but it was also the precursor to one of the most prosperous decades in the nation’s history. This economic event became known as the Forgotten Depression.

The Troops Come Home

On November 11, 1918, the First World War – billed as the war to end all wars – came to an end. Germany surrendered, agreeing to stop fighting and work out a peace arrangement with the Allied Nations (Great Britain, France, Italy, Russia, and the U.S.). The Treaty of Versailles was signed in June 1919, formally ending the conflict – and bankrupting the Weimar Republic.

As America’s presence in Europe diminished, millions of U.S. troops returned home. These soldiers had returned to the winding down of a 44-month economic boom, despite the war consuming more than half of the gross national product (GNP). The economic expansion was driven by exports, soaring from $2.4 billion in 1913 to $6.2 billion in 1917, largely because the U.S. was a neutral party until it joined the war effort in April 1917.

The labor market witnessed a dramatic surge in workers once American soldiers continually returned to the homeland. The civilian labor force faced tremendous challenges in absorbing these troops as many employers did not have positions for these men. Between 1918 and 1920, the U.S. Armed Forces saw employment decline from 2.9 million to 380,000.

Veterans also witnessed a transformation of the job market, with unions increasing their power as they took advantage of the tight labor market throughout the war. The American Federation of Labor (AFL) attempted to enhance its stranglehold on business after the war, launching noteworthy strikes in the meat and steel industries. These efforts failed, curtailing union power and reducing their position compared to before the war.

Because of the enormous influx of supply, businesses offered workers smaller wages, allowing them to cut their production costs, and slash prices. This eventually resulted in deflation later in the 1920s.

The Spanish Flu

From February 1918 to April 1920, the U.S. and the rest of the world faced an influenza pandemic known as the Spanish Flu. It infected approximately 500 million people worldwide, producing a death toll of at least 17 million. In the U.S. alone, there were roughly 670,000 deaths. Like the COVID-19 public health crisis of today, the pandemic resulted in multiple waves and devastation for the entertainment and service industries.

Officials Normalize Policy

As the U.S. transitioned from a wartime economy to a peacetime one, the government adjusted its fiscal and monetary policies.

One of the biggest changes had been cuts to spending. Policymakers feared a surging national debt, prompting officials to reduce federal government spending by two-thirds, from $18.5 billion in 1919 to $6.4 billion in 1920. The U.S. budget decreased to as low as $3.3 billion by 1922.

The Federal Reserve also responded by raising interest rates to 7% as the central bank had desired to fight the 20% inflation rate. The economy witnessed substantial inflation in bank credit and paper claims during this period, causing the money supply to contract. The Fed had later ditched its tightening efforts to ease monetary policy that fueled the Roaring Twenties’ historic growth.

America Diagnosed With a Depression

By January 1920, the U.S. economy had been diagnosed with an economic depression. The enormous contraction took place until July 1921. The severe economic event resulted in several crucial developments:

  • The unemployment spiked to 12%.
  • The gross national product (GNP) crashed 17%.
  • The Dow Jones Industrial Average plunged 47%.
  • Industrial output declined 10%.
  • Corporate profits plummeted 75%.
  • Business failures tripled to 120 bankruptcies per every 10,000 companies.

How did the federal government respond? President Woodrow Wilson did not do much, irking his successor, President Warren Harding, during the 1920 election campaign. However, when Harding finished gathering conferences and committees and signing stimulus and relief legislation, the depression had already ended. And, thus, a boom was born without dramatic state intervention.

The US Economy Recovers

In the summer of 1921, the U.S. economy entered into the recovery phase and transitioned into the most prosperous decade in the nation’s history. The unemployment rate fell below 7%, private-sector production ballooned, credit markets stabilized, the GNP grew 4.2% annually, wages increased, and investors became wealthy. The Roaring Twenties has become more than a footnote in American history. It was an unprecedented period for the United States, from incredible prosperity to prohibition to the prevalence of film and radio to the birth of the gangster. Nothing will ever emulate it again, which is why classrooms have entire lesson plans for the 1920s.

Economics Correspondent at and Andrew has written extensively on economics, business, and political subjects for the last decade. He also writes about economics at Economic Collapse News and commodities at He is the author of “The War on Cash.” You can learn more at

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