What We Learn from the 1920s: The Economy Then Looked a Lot like the Economy Now. but There Are Some Critical Differences

By Samuelson, Robert J. | Newsweek, February 12, 2001 | Go to article overview

What We Learn from the 1920s: The Economy Then Looked a Lot like the Economy Now. but There Are Some Critical Differences


Samuelson, Robert J., Newsweek


It may be a sign of the times that a 10th-grade history teacher recently assigned the following essay topic: What caused the Great Depression, and how do economic conditions then (the 1920s) and now compare? I know because a desperate mother--a friend--called seeking some useful references for her daughter. My first reaction was: good luck. For decades, the causes of the Great Depression baffled economists. My second reaction was: lots of people may be quietly asking similar questions. So I'll attempt some answers.

The parallels between the 1920s and today are intriguing and (of course) unnerving, because the Depression was--after the Civil War--America's greatest social calamity. In 1933 joblessness hit a record 25 percent of the labor force. Indeed, unemployment remained in double digits from 1931 until 1940, when it was cured by World War II defense spending. The Great Depression was terrifying because it was so resilient.

Hardly anyone thinks it could happen again. Memory matters. Governments now respond quickly to economic weakness. Just last week the Federal Reserve lowered its key interest rate (the Fed Funds rate) by 50 basis points to 5.5 percent. That makes a full percentage point cut in the past month. Most economists think the Fed will cut more, probably to below 5 percent. Similarly, the odds that Congress will pass a major tax cut increase daily. Lower interest rates and taxes would aid a faltering economy.

Still, the slowdown--or recession--could prove unexpectedly long or nasty. Cuts in interest rates and taxes are crude weapons. People may trim spending if they fear losing their jobs. Businesses curb investment if profits fall and idle capacity rises. Booms often end badly because people and firms--foolish or too optimistic--become overextended. They have spent or borrowed too much.

Here, parallels with the 1920s become troubling. Consider some obvious similarities:

The celebration of technology is common to both periods. In the 1920s, autos, the radio and appliances (refrigerators, vacuum cleaners) changed people's lives more than computers, the Internet and cell phones have today. From 1919 to 1929 the number of cars more than tripled, to 23 million. Road construction boomed. As for radio, "there was no such thing as radio broadcasting to the public until the autumn of 1920, but... by the spring of 1922 radio had become a craze," writes Frederick Lewis Allen in his 1931 classic "Only Yesterday." By 1929, Americans spent almost 1 percent of national income on radios; that's about $100 billion today.

People then, as now, were transfixed by the stock market. Investors in the late 1920s had "boundless hope and optimism," said one contemporary observer. Per-capita stock ownership, though much lower, grew proportionately more. As late as 1928, only 3 percent of Americans had shares; by 1930--even after the 1929 crash--it was 10 percent. In our era, stocks have become truly democratized. From 1989 to 1998, the share of households with shares or mutual funds rose from 32 to 52 percent.

Heavy consumer borrowing characterizes each era. …

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