Economic Evolution of the 1920s: From Boom to Instability

The Economic Landscape of the 1920s

Post-War Boom and Depression (1919–1921)

• 1919–1920: Post-War "Boom" – This period was characterized by a short and abrupt increase in prices, repressed demand, scarce supply, and accumulated savings. This brief boom had beneficial effects, particularly in increasing employment.
• 1920–1921: Post-War Depression – This phase involved the conversion costs of transitioning from a war economy to a peace economy. Falling prices made the payment of allied debts difficult, leading to increased production and a deflationary process. Furthermore, the contraction of American foreign credit reduced the availability of capital, resulting in chronic unemployment, restrictions on immigration, and a return to protectionism as signs of difficult times ahead.

Growth with Instability (1925–1929)

By the end of this period, pre-war income levels were reached, but substantive problems remained.

Structural Economic Challenges

• Primary Sector: Overinvestment during the war led to an excess of productive capacity in neutral and "new" countries. This resulted in an excess of supply and falling prices.
• Secondary Sector: Employment demand in industries related to the Second Industrial Revolution was capital-intensive and failed to absorb unemployment.
• International Trade: While the 1913 trade volume was reached by 1924 in absolute terms, relative to GDP, indices in 1929 were lower than those of 1913. Neutral countries replaced imports with national products following their industrialization. Balance of payment deficits accentuated economic nationalism and protectionism. The United States increased tariffs for protection against European imports, which were cheaper due to currency devaluation. Japan, the US, and neutral countries served markets previously unattended by Europe in South America and the Pacific.
• Capital Movement: There was a significant alteration of flows in origin and destination. Between 1924 and 1930, 60% of international financing came from the US, directed toward South American industrialization and Eastern Europe (especially Germany, which received one-third of the total). Many of these were private investments attracted by high interest rates. From 1927, capital remained in the US due to the New York Stock Exchange financial bubble, leaving indebted economies near a suspension of payments.

Monetary Reorganization and the Gold Standard

The return to the Gold Standard and the reorganization of the monetary system demanded stabilization and deflationary policies. The lack of US participation made these agreements fragile. Furthermore, reaching shared solutions to fight inflation and set currency parity with gold was problematic due to diverse national situations.

Despite an unsuccessful attempt to involve the US in the restoration of the Gold Standard at the Geneva Conference (1922), some agreements were reached:

• Besides gold, currencies convertible into gold (such as the US Dollar and British Pound) were accepted under the Gold Exchange Standard.
• Countries were recommended to desist from competitive devaluations (the "beggar-thy-neighbor" policy). In the absence of foreign currencies, the prescribed answer was deflation.