The global economy suffered a major contraction in 1920. In a single year US production fell by 21%, US GDP declined 24% and unemployment shot from 4% to 12%. Nevertheless, the economy had begun a significant recovery in 1921, and a long term depression never occurred.
As Tom Wood outlines in this tremendous presentation, the key factor that aided the swift economic rebound was the decision by policy makers to stand aside, and let the economy work out mal-investments by itself. In fact, the President (Warren Harding) embarked on a policy of cutting government spending and advocating deflation. What a complete contrast to the stimulative efforts employed in the 1930s and in 2008 and 2009.
Eerily, it turns out that Japan's response to the 1920 crash was massive stimulus which led to a "lost" decade, and even greater economic ruin in the late 1920s.
I can only shake my head in disbelief to hear the leaders of 2009 argue that the only problem with Japan's failed stimulative efforts of the 1990s was a lack of aggressiveness.
