The shadow of 1921

The shadow of 1921

Commentators love to look at recent examples of economic history to figure out what the road map could be today. Some are more convincing than others. We’d suggest this period isn’t like the 1970’s (very high inflation, stagflation). We have heard solid arguments for it resembling the late 1960’s (US war expenditure, increasing inflation), but remain sceptical. There are some credible arguments for saying this is a bit more “goldilocks” and comparable to the 1950’s (post war debt, full employment, strong demand, creepingly higher inflation).  But it’s different to 1921.


The recession of 1920-21 followed the quick, initial post-war boom. The recession was short and sharp and as economist, Paul Krugman points out, it was the last time the (relatively new) Federal Reserve raised rates with no Keynesian fiscal policy counterbalance. Also, with the demobilisation of a couple of continent’s armies, there was plenty of spare capacity in workforces following the difficult and slow realignment back to civilian life.


There are many other factors of course, but the Fed’s response and employment were central then as they are now. Whilst markets have become excited about the prospects of a change in Fed policy - in reality, all that has been intimated is a slight shortening of a very leisurely pace in the reduction of policy easing. That’s not quite same as the 2.25% rate hike cycle that occurred from December 1919 to June 1920! On the employment front, if there is an issue today, it has been that the changes brought on by Covid have created employment mismatches; and “quality” staff are to be cherished and nurtured. Many examples of labour shortages in various sectors (especially hospitality) abound in mid-2021. This is very different from the estimated c.10% unemployment in 1921.


But finally, and most compellingly, 1921 saw a contraction of the monetary base by almost 20%. Given the trillions spent throughout the world by concerned governments, that deflationary spiral doesn’t seem imminent. Equally, as Krugman points out, recoveries from high debt balances tend to be more “U-shaped” than “V-shaped” – articulated through his comments from ten years ago in the New York Times: 1921 and All That - The New York Times (


The path in-between rampant inflation and deflation may be narrow, but it is also the most likely one.


Further information here: Depression of 1920–1921 - Wikipedia

Adrian Hull

Head of UK Fixed Income

Adrian Hull is Head of UK Fixed Income

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