The 1920s and the 2020s: Could History Repeat Itself?

The 2020s are looking a lot like the Roaring 1920s, a period of garish American prosperity

in the aftermath of World War I. The question is will the US make updated versions of the

mistakes it made in the 1920s that led to the stock market crash of 1929, the near collapse

of US and European capitalist economies, and the Great Depression that lasted a decade.

“Only Yesterday” by Frederick Lewis Allen is the story of the successes and excesses of the

1920s. “Since Yesterday” is Allen’s remorseful sequel written in 1939 after a decade of

Depression. Aspirational consumerism and display are characteristics of both the 1920s

and the 2020s. Risky stock market speculation was central to prosperity as it is now.

Prestigious financial firms are again hawking enticing investment vehicles to hopeful

speculators who are vulnerable to a downturn as they were 100 years ago.

Americans in the 1920s for the first time had easy access to consumer credit as they do

today. Easy credit put prosperity in reach of millions more people, but also increased risk. 

There was a rush to acquire automobiles, radios, and the like “on time.” Sexual mores

changed dramatically. The moral confusion of the period was described by Sinclair Lewis in

“Babbitt,” his classic about a small-town businessman adrift in a world where so much was

changing and corrupted. “Babylon Revisited” by F. Scott Fitzgerald (1931) is about the

guilty regrets that followed the “Roaring 20s.”

Bootleggers in the 1920s became folk heroes. Prohibition led to illicit fortunes and

gangsterism. Liquor was ferried across the frozen Great Lakes from Canada in cars.

Churches and synagogues sold large quantities of “sacramental” wine while police looked

away.  Today cocaine, fentanyl and addictive prescription drugs enrich another generation

of bootleggers.

Women wore ankle length dresses and gloves before World War I. In the 1920s, “flappers,”

today’s “influencers” exposed their arms and shoulders in skippy dresses, coveted nylon

stockings and wore layers of rouge and lipstick.

US urban centers were growing in the 1920s but farmers and rural people were struggling.

Urban rents were rising painfully as people left the land to live and work in cities, a pattern

that continues today.

World War I, at first called the European War, began in August 1914. The US entered the

war only in April 1917, but America’s enormous resources in men and materiel determined

the outcome. Even before the US entered, however, the UK and France borrowed huge

sums from private US lenders often to relend to less credit-worthy allies like Italy and

czarist Russia.

Winners and losers in the war depended on loans at low interest rates from American

financiers in the 1920s to pay interest on wartime loans, as well as enormous reparations

in the case of Germany. US rates on loans to buy stock “on margin” increased from 4

percent early in the 1920s to 12 percent in 1928 and 1929. European borrowers had to pay

these rates and more to be able to continue borrowing. American financial firms provided

Europeans with the dollars they needed to pay their debts by selling the securities of

European borrowers to US customers. German railroad bonds and utility stocks were

marketed as safe investments to American retail customers unaware of the risks.

John Maynard Keyes, the famous economist, who advised the UK delegation at the Paris

Peace Conference in 1919, warned that debtor countries --- essentially everyone but the US

---would not be able to repay the debts they had taken on to pay for the war. He counselled

instead that German reparations should be drastically reduced and that wartime loans

from the US to its allies should be written off so that Europe could rebuild and recover.

US President Woodrow Wilson and UK Prime Minister David Lloyd George, who attended

the Paris Conference for months, at first were amenable to lower payments.  As the

Conference dragged on, however, it became clear that the public and politicians in the US,

UK, France and Italy demanded financially impossible and punitive terms. Wilson in Paris

was told by his political advisors in the US that the American public was against the “soft

peace” he had promised earlier. He and Lloyd George both caved in and the Peace

Conference set impossible financial terms for wartime allies and defeated enemies. The

hope was to salvage the situation in the 1920s when wartime bitterness had faded.

Indeed, there were negotiations in the 1920s (the Dawes Plan (1924) and the Young Plan

(1929)) to reduce the enormous payments, but the adjustments were not enough to avoid

financial disaster. The situation became impossible in 1928 and 1929 when the US Federal

Reserve Bank raised rates to try to contain speculation in the US stock market.

Businesses, consumers and governments in the US and overseas could not continue

borrowing at higher rates and stock prices collapsed. The “Crash” was followed by the

Great Depression with defaults in the US and overseas, soaring unemployment, bread lines,

and round after round of falling prices and wages.

The US government had the ability to create and spend money, as Keynes would have had it

do from 1919 on. It could have contracted to build public facilities at home and overseas,

creating private jobs in the process. The US during the New Deal from 1933 to 1938 did

reluctantly increase spending, but not enough to fill the enormous shortfall in demand

created by the long Depression. Finally, World War II came (1939-1945) and surging

defense spending and the mobilization of 11 million men for the war created full

employment and supported the US economy for years afterward.

The 2020s aren’t the 1920s. There are financial guardrails that did not exist before the New

Deal, although some would like to dismantle them. It will be hard to cut spending on public

works, social and health insurance. Probably the stock markets will continue to function

even when stocks come down from today’s “frothy” highs. Despite threats, there is unlikely

to be another trade war as punishing as the one that began with the Smoot-Hawley Trade

Act of 1920.

Wars in Ukraine and the Middle East and tensions in Asia probably are not as dangerous as

the bloody wars in Russia, Eastern Europe and Turkey in the early 1920s.  Transformative

new technologies like AI are unlikely to increase unemployment quickly.

Hopefully, the US with its enormous real resources will be more farsighted than it was in

the 1920s. But the 2020s look enough like the earlier era to be very, very frightening.