I have often found it curious that the U.S. had two post-World War I demobilization recessions, rather than just one, with the later one being much more severe than the earlier. The U.S. also apparently had two post-World War II demobilization recessions, but the 1948-49 recession isn’t as interesting because industrial production fell by only 9 to 10%, not by 32% as in 1920-21, and was much less severe than that in 1945. The simple fact of the matter is that the recessions of 1920-21 and 1918-19 were distinct due to the delayed effects of government deficit spending. Due to confusion about when the war would end, U.S. government spending cuts in the aftermath of the armistice occured remarkably late (in comparison to those just after WWII) and the industrial demobilization that occured in 1918-19 was remarkably incomplete (yes, the yearly estimates are for the entire year). Thus, up to mid-1920, the U.S. economy was wildly overheated in all but real output and stock prices. The period between the two demobilization recessions was characterized by an import boom (the export boom only ended after the end of the import boom), high inflation (up to June 1920), and the yield curve being steeply inverted. This period was apparently the only one in U.S. history in which the yield curve inverted before a recession and continuously remained inverted into the next recession.

The total length of the 1920-21 recession was the same as that of the recession of 2008: 18 months. This was normal for pre-Great Depression U.S. recessions, but one has to remember that the recession of 2008 was the longest the U.S. has experienced since the Great Depression. The most severe portion of the recession occured between August 1920 and March 1921. This was a period of strong deflation, a flattening yield curve, and the highest short-term real interest rates in the history of the United States. The end of the 1920-21 recession also had significant downward wage flexibility, which helped lead to a speedy and strong recovery. The idea that either the Federal Reserve or tax cuts had much to do with the end of the 1920-21 recession is rather dubious. The New York Fed Discount Rate was over 50 basis points higher at the end of the recession than at its beginning. Likewise, the recession was pretty much over by the time the first of the Mellon tax cuts were put into effect in July of 1921.