World Depression of 1921 - Report Example

Topic: World Depression of 1921 All the countries of world have experienced depression because of bad business cycles and recession. There are economic downturns as well booms and upheavals in the course of time just like ups and downs in any aspect of life. Depression occurs when there is a 10% decline in Gross Domestic Product or else a recession lasting more than three years. America, being a first-world country has lived through some of the greatest depressions in the history. The Depression of 1920–21 was one of them, which lasted from January 1920 to July 1921. Shortly, after the World War 1, the economy of United States was subjected to an extremely sharp deflationary recession (increasing interest rates and limiting credit) where the extent of the deflation was not only large, but large in relation to the accompanying decline in real product. Extreme deflation was a key characteristic of the Depression of 1921, which claimed to be the largest one-year percentage decline in almost 140 years of recorded data. The Department of Commerce estimates 18% deflation, Balke and Gordon estimate 13% deflation, and Romer estimates 14.8% deflation. There was also a severe drop in wholesale prices, falling by 36.8% worse than any year during the Great Depression .The deflation of 1920–21 was absolutely at extreme and also unusual, small decline in gross domestic product also occurred. Stocks fell significantly during the recession. The Dow Jones Industrial Average reached a peak of 119.6 on November 3, 1919, two months before the recession began. The market bottomed on August 24, 1921, at 63.9, with a decline of 47% (by comparison, the Dow fell 44% during the Panic of 1907 and 89% during the Great Depression). The business climate was terrible. The pace of business failure tripled, during 1919 to 1922, it mounted from 37 failures to 120 failures per every 10,000 businesses. Those fortunate businesses that avoided bankruptcy saw a 75% decline in profits. Some factors that have been pointed out as potential causing or contributing to the downturn in 1921 include: soldiers returning from the war, which created a rise in the civilian labor force, a decline in labor union conflict, a shudder in agricultural commodity prices, tighter monetary policy, reduced government spending and people’s expectations of deflation. When World War 1 ended, factories that were previously focusing on war time production had to shut down or change their production. Right after the war ended, a great number of soldiers demobilized leading to adjustments like the re-entry of soldiers into the civilian labor force, increasing it by 1.6 million people or 4.1% in a year (the largest one-year documented labor increase). In the early 1920s, both prices and wages changed quicker than today, and thus employers may have been quicker to offer reduced wages to returning troops, thus lowering their production costs and prices. During World War I, labor unions had increased their power because the government had greater need for goods and services and with so many young men in the military; there was a tight labor market. After the World War I, there was a period of turmoil for labor unions; they were in less demand as the government did not require that much goods and services that they needed during the course of war due to which bargaining power was lost by the labourers. In 1919, 4 million workers went on strike at some point, notably more than the 1.2 million in the preceding years. Major strikes included an iron and steel workers strike, a bituminous coal miners’ strike and a major railroad strike in 1920. According to economist J.R. Vernon, however, "By the spring of 1920, with unemployment rates rising, labor ceased its aggressive stance and labor peace returned." This further permitted wages and prices to fall. At the end of the war the United States’ Federal Reserve Bank of New York, formed in 1913, started raising interest rates sharply. In December 1919 the interest rate was raised to 4.75% from 4%. A month later it was raised to 6% and in June 1920 it was raised to 7% (being the highest interest rates of any period except the 1970s and early 1980s). The high rates stridently reduced the amount of bank lending in the country, both to other banks and to consumers and businesses. The United States no longer maintained gold reserves backing each US dollar after the creation of the Federal Reserve in 1913. The general public, however, was not yet familiar with fiat money. Under the Gold Standard, a period of inflation was necessarily followed by a period of deflation, because the supply of money could not change, and there would obviously not be enough money to pay ever-higher prices. The general trend in the economy had been inflationary since 1896 and till 1920 prices increased quickly. Therefore, people and businesses expected prices to fall down substantially. The greatest effect was on unemployment which rose sharply during the recession. Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. A lot of sources claim that it reached to 11.7% and agreed that unemployment quickly fell after the recession, and by 1923 had returned to a level consistent with full employment. Industrial production also declined after recession. From May 1920 to July 1921, automobile production declined by 60% and total industrial production by 30%. At the end of the recession, production quickly bounced back. Industrial production returned to its peak levels by October 1922. Using a variety of indexes, Victor Zarnowitz found the recession of 1920–21 to have the largest drop in business activity of any recession between 1873 and the Great Depression. There was an extreme unemployment, high interest rates and reduced government spending but the government did nothing about it and the NY Fed actually raised interest rates. The government’s response allowed the economic problems to self-correct rapidly leading to the 1920’s boom. GNP had declined 17%. After the depression, unemployment declined to 6.7% in 1922. By 1923, it was 2.4%. A simple understanding out of this is that the government did not bail out stagnant businesses. The Fed actually increased interest rates, which speed up the failure of unsound businesses. Only the strong businesses survived. There was no minimum wage law. Workers got back to work at sound businesses that paid what the market would offer and unemployment declined rapidly. It shows that how quickly the free market can restructure itself when it is allowed to. It always will restructure itself, when necessary. But it depend various factor that how long will it take. When government tries to stagnate the economy by continuing bad practices producing those goods that no one buys. It slows down the recovery by taking resources from sound, profitable, efficient businesses and people and transferring it to unsound, unprofitable, and inefficient businesses/people. Trade union membership almost doubled from 1915 to 1920 which were the years of war and post-war economic boost. Industries often avoid trade unions as they come as a threat to them. During this time, labour movement was treated as a legitimate representative group for the first time by the Federal Government. In 1920 there were 5 million members in union which continually declined till 1933. After major strikes in 1921-23 (including an unsuccessful attempt to organize the steel industry), trade unions were unable to exert direct pressure on employers for many years, until the passage of the Wagner Act in 1935, which promoted unionization and collective bargaining in support of the collective interests of workers. The compensation studies conducted by the Bureau of Labour Statistics during World War I were under the authority of Congress, to address particular needs. The War Industries Board was also created to increase production, mobilize the labour force, maintain peaceful labour-management relations, and stabilize prices and wages. There were wartime demands from various agencies for information on wages and hours, strikes and lockouts, and labour placed additional requirements on the Bureau. In late 1918, when the war was almost over, funding was allocated for the Bureau to undertake wage surveys for use in the solution of labour problems in a number of industries and to provide a record of industrial conditions at the height of the consistent war effort. The Bureau’s regular, pre-war program had included only 10 industries surveyed at 2-year intervals. In May 1920, results of wages and hours surveys were conducted. During 1918 and 1919, it got published for fully 780 occupations in 28 industries. In the years 1920-21, public attitudes and policies encouraged business interests, so the Bureau had little opportunity to expand or improve its work. But it did spread out coverage of industry wage studies into 20th century manufacturing industries and expanded into newly emerging compensation practices, such as bonus systems and pay for overtime, Sunday, and holidays which proved to be motivational for workers. Even though surveys were restricted to manual jobs and largely selected jobs in the manufacturing sector, these surveys provided a realistically consistent body of data on both the structure and trend of wages for industrial workers. During this retrenchment (reduction of expenditure) period, the Bureau was able to continue their old late nineteenth century programme of union scales of wages and hours of labour.. Data were collected for occupations in five industries—bakeries, building trades, marble and stone trades, metal trades, and printing—for localities throughout the country for a survey to improve their performance, which is as follows. Occupation 1913 Hours per week 1913 Earnings per hour 1920 Hours per week 1920 Earnings per hour 1925 Hours per week 1925 Earnings per hour Bricklayer 44 $0.750 44 $1.250 44 $1.500 Painter 44 $0.650 44 $1.250 44 $1.500 Plumber 44 $0.750 44 $1.250 44 $1.205 Stonecutter 44 $0.625 44 $1.250 44 $1.375 Typesetter 48 $0.500 48 $0.988 44 $1.191 A President Conference on unemployment was conducted by President Warren Harding as a result of rising unemployment during the recession. Around 300 eminent members of industry, banking and labor were called together in September 1921 to discuss the problem of unemployment. A committee was created which established a branch in every state having substantial unemployment, along with sub-branches in local communities and mayors emergency committees in 31 cities. The committee provided relief to the unemployed, and also organized collaboration between the local and federal governments. Harding declared that liquidation was inevitable and attacked governmental planning and any suggestion of Treasury relief. He said, "The excess stimulation from that source is to be reckoned a cause of trouble rather than a source of cure." The Conference conducted studies aimed at preventing future depressions through better management of the business cycle and also provided practical assistance to local committees and encouraged a variety of local actions. These actions included the stimulation of public works and clean-up projects, advice on the organization and techniques of fund raising, and urging employers to adopt "work-sharing" plans. The Conference soon became an effective clearinghouse, providing jobs and temporary unemployment relief. This Reconstruction Program and Economic Conference of 1920 praised collective bargaining and unionism. It also emphasized that wage rates should be maintained, or even raised, to stave off any threatening depression. The Conference Board reported that "Much was heard of the dawn of a new era in which major business depressions could have no place." Professor Leo Wolman has stated that the prevailing theory during the 1920s was that "high and rising wages were necessary to a full flow of purchasing power and, therefore, to good business”. The principle of high wages and low costs as a policy of enlightened industrial practice, attracted many economists thereafter. In 1920, Hoover also ordered a meeting of leading industrialists with "advanced views" on labour relations to try (unsuccessfully) to persuade them to "establish liaison" with the American Federation of Labour. From 1919 till 1923, Hoover tried to convince private corporations to insure adopting unemployment insurance, and in 1925 he praised the American Federation of Labour as having "exercised a powerful influence in stabilizing industry." He also favoured the compulsory unemployment of a child labour amendment, which would have worsen the national product, and raised labour costs as well as the wages of competing adult workers. Trade union and employer associations participate along with governments in its prevailing structures and in the annual International Labour Conference where Conventions are negotiated and implemented. Opportunities were seen for labour in the workers rights declared in the Treaty of Peace signed at Versailles and institutionalized in the ILO. Economists started commenting on workers expectations as they saw them doing successful experiments in labour management and argued that workers basically want security in a good job, not any role in financial management; managers are responsible to stockholders, the workers and the community. Actions were taken to ensure accident prevention and health and unemployment insurance provided by the enterprise. Emphasizing the need for labour to be organized was very important and institutional mechanisms to ensure workers representation, and the content of an employees bill of rights and an industrial creed was essential. Hoover persuaded Harding, the president, to hold a conference of steel manufacturers after the Depression of 1921, at which they called on the magnates to eliminate the 12-hour day to 8-hour day. An appreciative biographer notes with satisfaction that Hoover made the steel leaders "squirm." Previously when this was emphasised, it aroused steel and iron industry manufacturers on which the workers called on a strike. The strike failed and in January 1920 public opinion was on the US Steel side. However, the commission issued a favourable report to the strikers in July 1920, and initiated the 8-hour day agitation. The report started a propaganda war, with the nations leftists trying to change the whole temper of public opinion. The Reverend A.J. Muste, the Socialist New York Call, Labour, and The Nation backed the report, while business associations like National Association of Manufacturers, the National Civic Federation, the Wall Street Journal, and others strongly attacked the inquiry. Many religious papers, however, were persuaded by the prestige of the committee to change their previous views and to line up on the anti-steel side attempting to persuade industry to adopt a reasonable working hour day. The government finally mobilized the public opinion in favour of the workers, with the president’s support. Mort Dock engineering company’s workers could also be an example here. They changed their economic conditions and business strategy after the labour relations management efforts in 1921. The two important changes occurred, which affected workplace industrial relations at Mort’s. Firstly, Mort’s business strategy changed, with general engineering becoming far more important than had been earlier. This had allegation for the structure of employment and the firm’s attitude to industrial relations, with labour costs becoming a more important concern. Secondly, arbitral regulation shifted to the Commonwealth Court of Conciliation and Arbitration, introducing a major innovation which was weekly and daily hiring. After the recession, the development of a body of international labour law was already under way, "because it aims at securing to the whole of the labouring portion of mankind a certain minimum of rights." and. "The final purpose of international labour law is to place beyond attack from international competition a minimum of conquests in the world of labour, such as shall constitute a human charter." Ernest Mahaim. We have seen that the high rates of the 1920–1921 depression had certainly been agonizing, but they had cleaned the rot out of the structure of production quite systematically and thoroughly. The US money supply and prices had nearly doubled during World War I, and the record-high discount rate starting in June 1920, which was a pressure washer on the mal-investments that had festered during the war boom. References: 1. US Business Cycle Expansions and Contractions, National Bureau of Economic Research. Retrieved on September 22, 2008. 2. Vernon, J.R., "The 1920-21 Deflation: The Role of Aggregate Supply," Economic Inquiry, Vol. 29, 1991. 3. Lawrence H. Officer, "The Annual Consumer Price Index for the United States, 1774-2008," Measuring Worth, 2009. URL: http://www.measuringworth.org/uscpi/ 4. Louis D. Johnston and Samuel H. Williamson, "What Was the U.S. GDP Then?" Measuring Worth, 2008. URL: http://www.measuringworth.org/usgdp/ 5. Christina Duckworth Romer (1988). "World War I and the postwar depression; A reinterpretation based on alternative estimates of GNP". Journal of Monetary Economics 22 (1): 91-115.  6. "Diagnosing depression". The Economist. December 30 2008. http://www.economist.com/businessfinance/displayStory.cfm?story_id=12852043.  7. 24/Romer_UnemploymentData.pdf.  8. Anthony Patrick OBrien (1997). "Depression of 1920–1921". Glasner. D, Thomas F. Cooley. Business cycles and depressions: an encyclopedia. New York: Garland Publishing. pp. 151–153.  Read More