What exactly "roared" during the 1920s, and why did it end with a Great Depression?
We don't have good GDP figures for the 1920s, but we do have good industrial production figures starting with 1919. We also have good figures for the money supply in the 1920s.
Back then the world followed a "gold" standard for issuing currency. Supposedly there was a dollar's worth of gold in the vault backing every dollar of paper currency, according to a fixed weight/value ratio. This system had been placed under impossible stress during The Great War (WW1) because the major fighting nations had to borrow (and print) enormous amounts of money to finance the war from 1914-1918. In reality, the gold standard was suspended during the war and approximately until 1920. The UK, for example, allowed its money supply to nearly triple during the war. From 1920-1922, the world's major central banks withdrew some of this extra cash, causing a harsh recession, and then tried to hold the money supply steady under a renewed gold standard.
But the war had also unleashed a great deal of existential productive ingenuity in Europe and the US -- you could call it the Industrial Revolution on Steroids. As this productive ingenuity turned from war materiel to consumer goods, banks supplied large amounts of consumer credit to finance purchases, and large amounts of industrial credit to finance production, and even large amounts of margin credit -- to buy publicly traded stocks. A bank can "create" cash by lending one person's deposits to another, effectively evading the gold standard. People treat their bank deposits like cash, even though there's only a fraction of their deposits sitting in the vault.
Whereas the underlying amount of paper cash in circulation didn't go up during the 1920s, the amount of industrial production per dollar doubled, reflecting the expansion of bank credit. And speculation in stocks drove stock valuations up 6x from 1920 to 1929.
This was a classic credit bubble, really the first modern version. There had been bubbles and panics in human history before, but the magnitude of this combination of bank credit and industrial growth had never been seen before.
Inevitably, there wasn't enough cash in the system to support this exuberant expansion of credit, and then the bubble popped. A lot of the bank debts were uncollectible, so a lot of banks failed, and the restrictions of the gold standard meant the federal government couldn't print gobs of new cash to rescue the economy. The economy had to continue shrinking until the ratio of production to cash fully reset.
On a year-over-year basis, the Great Depression was no worse than the recession of 1920. But the Great Depression continued for three years, not just one year, until the amount of industrial production per dollar crashed all the way back to where it had been at the beginning of 1921. Ouch, a decade's worth of growth destroyed.
The best thing FDR did after he was inaugurated, was to blow up the gold standard to allow for steady, long-term increases in the money supply, to match the long-term increases in industrial production. The world economy was no longer a Malthusian agronomy, it had transformed into an exponential industrial growth engine, and that exponential growth required enough cash to lubricate consumer purchases and industrial investment.
During FDRs 12 years in office he allowed the supply of US Dollars to nearly quintuple, which allowed inflation-adjusted GDP to nearly triple during his leadership, an accomplishment no other President has approached since. Tripling the size of the economy under one President?!?!? In retrospect, the gold standard had been strangling the Industrial Revolution in its crib -- the money supply needed to expand along with production. Kaboom!
-----
But since then we've learned it is possible to overdo the "print more cash" action, printing cash faster than GDP can grow, which leads to too much inflation, like the world is experiencing now after central banks printed too much cash during the pandemic. And printing more cash can cause credit bubbles to intensify, along with asset bubbles. Nowadays, it isn't a gold standard that limits the amount of cash in circulation, it is the arbitrary decisions of the Federal Reserve and other central banks -- they decide when to pull the plug.
So, nowadays we tend to have recessions when the central bankers feel the economic party has gotten out of control, with too much credit and too much cash and too much inflation and too bubbly asset prices.
Right now the Federal Reserve is shrinking the supply of US Dollars (adjusted for US inflation) at the fastest rate of our lifetimes, trying to squeeze inflation back down to its 2% target. Shrinking the money supply faster than in 1980 when inflation hit 15%, faster than in 1974 when inflation hit 12%, because last year inflation hit 9%.
What can we say about both 1974 and 1980? Recessions occurred during both of these years. Nixon resigned in 1974. Carter was defeated by Reagan in 1980. Shrinking the money supply is an economy killer, and a President killer (not literally, Carter is still alive as I write this LOL).
The Federal Reserve is reacting to the highest inflation in 40 years, by shrinking the money supply about as quickly as it ever does. Maybe we should pay attention to what happened the other times the Federal Reserve reacted like this?
Nah. Everything is fine :-)
Back then the world followed a "gold" standard for issuing currency. Supposedly there was a dollar's worth of gold in the vault backing every dollar of paper currency, according to a fixed weight/value ratio. This system had been placed under impossible stress during The Great War (WW1) because the major fighting nations had to borrow (and print) enormous amounts of money to finance the war from 1914-1918. In reality, the gold standard was suspended during the war and approximately until 1920. The UK, for example, allowed its money supply to nearly triple during the war. From 1920-1922, the world's major central banks withdrew some of this extra cash, causing a harsh recession, and then tried to hold the money supply steady under a renewed gold standard.
But the war had also unleashed a great deal of existential productive ingenuity in Europe and the US -- you could call it the Industrial Revolution on Steroids. As this productive ingenuity turned from war materiel to consumer goods, banks supplied large amounts of consumer credit to finance purchases, and large amounts of industrial credit to finance production, and even large amounts of margin credit -- to buy publicly traded stocks. A bank can "create" cash by lending one person's deposits to another, effectively evading the gold standard. People treat their bank deposits like cash, even though there's only a fraction of their deposits sitting in the vault.
Whereas the underlying amount of paper cash in circulation didn't go up during the 1920s, the amount of industrial production per dollar doubled, reflecting the expansion of bank credit. And speculation in stocks drove stock valuations up 6x from 1920 to 1929.
This was a classic credit bubble, really the first modern version. There had been bubbles and panics in human history before, but the magnitude of this combination of bank credit and industrial growth had never been seen before.
Inevitably, there wasn't enough cash in the system to support this exuberant expansion of credit, and then the bubble popped. A lot of the bank debts were uncollectible, so a lot of banks failed, and the restrictions of the gold standard meant the federal government couldn't print gobs of new cash to rescue the economy. The economy had to continue shrinking until the ratio of production to cash fully reset.
On a year-over-year basis, the Great Depression was no worse than the recession of 1920. But the Great Depression continued for three years, not just one year, until the amount of industrial production per dollar crashed all the way back to where it had been at the beginning of 1921. Ouch, a decade's worth of growth destroyed.
The best thing FDR did after he was inaugurated, was to blow up the gold standard to allow for steady, long-term increases in the money supply, to match the long-term increases in industrial production. The world economy was no longer a Malthusian agronomy, it had transformed into an exponential industrial growth engine, and that exponential growth required enough cash to lubricate consumer purchases and industrial investment.
During FDRs 12 years in office he allowed the supply of US Dollars to nearly quintuple, which allowed inflation-adjusted GDP to nearly triple during his leadership, an accomplishment no other President has approached since. Tripling the size of the economy under one President?!?!? In retrospect, the gold standard had been strangling the Industrial Revolution in its crib -- the money supply needed to expand along with production. Kaboom!
-----
But since then we've learned it is possible to overdo the "print more cash" action, printing cash faster than GDP can grow, which leads to too much inflation, like the world is experiencing now after central banks printed too much cash during the pandemic. And printing more cash can cause credit bubbles to intensify, along with asset bubbles. Nowadays, it isn't a gold standard that limits the amount of cash in circulation, it is the arbitrary decisions of the Federal Reserve and other central banks -- they decide when to pull the plug.
So, nowadays we tend to have recessions when the central bankers feel the economic party has gotten out of control, with too much credit and too much cash and too much inflation and too bubbly asset prices.
Right now the Federal Reserve is shrinking the supply of US Dollars (adjusted for US inflation) at the fastest rate of our lifetimes, trying to squeeze inflation back down to its 2% target. Shrinking the money supply faster than in 1980 when inflation hit 15%, faster than in 1974 when inflation hit 12%, because last year inflation hit 9%.
What can we say about both 1974 and 1980? Recessions occurred during both of these years. Nixon resigned in 1974. Carter was defeated by Reagan in 1980. Shrinking the money supply is an economy killer, and a President killer (not literally, Carter is still alive as I write this LOL).
The Federal Reserve is reacting to the highest inflation in 40 years, by shrinking the money supply about as quickly as it ever does. Maybe we should pay attention to what happened the other times the Federal Reserve reacted like this?
Nah. Everything is fine :-)