The post-World War I economic crisis
This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> Keynesianism
Last updated: 2026-08-18
The crisis of 1920–1921 was the liquidation of the inflationary boom of World War I.
The sequence
-
1917–1919: The war was financed with deficit spending and a great deal of credit creation (lowering the Interest Rate) by the Federal Reserve. There was strong Inflation.
-
1920: The Fed (under Benjamin Strong) aggressively raised rediscount rates (up to 7%) to halt inflation and defend the gold standard. Gold was leaving the United States.
-
Depression of 1920–1921 (approximately January 1920 – July 1921):
It was very sharp. Industrial production fell by around 30%, wholesale prices collapsed (by more than 35%), and unemployment rose a great deal.
But it was short. Recovery began in 1921.
Why the Austrians insist so much on 1920–21
They use it as a contrast. In that recession:
- Prices and wages were allowed to fall substantially.
- The government cut spending and balanced the budget.
- There was no large program to prop up wages or prevent the liquidation of firms.
That is why, according to them, the adjustment was painful but relatively rapid.
The 1920–21 crisis did not “lead” to the expansion of the 1920s. It was the end of a previous cycle (the wartime one). After recovering from it, the Fed started a new cycle of easy credit that, according to Austrian theory, created the malinvestments that burst in 1929.
This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> Keynesianism
| Previous topic | Next topic | |
|---|---|---|
| <- The post-World War I crisis | <--> | The Great Depression-> |
Last updated: 2026-08-18
| | | |
This site was written based on publicly available free articles from the internet.
The content of this site is available under the: Creative Commons Attribution 4.0 International (CC BY 4.0) license.
You can freely copy, redistribute and modify the material, as long as the source is mentioned: liberwiki.com