Are we on the verge of another 'Roaring Twenties'? If so, should we be cheering or weeping? Superficially at least, there are similarities today with the US a century ago. True, we haven't just experienced a world war but, as after the Spanish flu, there's hope that the world economy is set to bounce back dramatically.
The 1920s saw the adoption of cars and planes and the birth of radio and talkies – innovations still with us, though robotics, artificial intelligence and electric cars could be heralding another great economic transformation.
But actually, the Twenties didn't roar as we typically imagine. US living standards rose but most other major economies did better – European nations and the Soviet Union much better as they bounced back from war scarring.
Even so, US living standards started high. By 1900, US per capita incomes had overtaken the UK's, but by 1920 they were 45 per cent higher. A new Washington-led, international economic dominance had begun.
Yet the US had a financial system expanding unsustainably. Low interest rates fuelled a 50 per cent jump in consumer credit over four years.
It was an unequal society: the share of wealth accruing to the richest 1 per cent rose from 36 per cent in the early 1920s to around 48 per cent before the 1929 Wall Street Crash. But when rates rose, the US stock market lost a third of its value; the economy collapsed into depression and GDP per head contracted more than 10 per cent.
It is foolish to suggest that history repeats itself. Yet some of the challenges that emerged then risk being repeated now. There is no Gold Standard today but the Federal Reserve sets monetary conditions for many countries besides the US. And there is again conflict between domestic prices and financial stability as stockmarkets rise.
There is also conflict today between monetary and fiscal policy. Huge rises in public debt, exacerbated by the pandemic, have left governments vulnerable to interest-rate increases. The personal saving ratio reached record highs during lockdowns; when we finally emerge, resumed demand could exert upward pressure on interest rates. Keeping rates low risks inflation or higher asset prices.
And just as the Roaring Twenties only roared for some, coronavirus has heighted regional and racial inequalities. Even before the pandemic, those with significant financial wealth were doing very well, helped by quantitative easing pushing up asset prices.
The 1920s political response was isolationism and immigration laws in the US, revolution and putsch in Germany. Benito Mussolini came to power in 1922, Europe's first major fascist leader, but others followed.
The chaotic 1920s and 1930s saw competing international rivalries with no obvious global leader. The UK's demise as the world's dominant power created a vacuum that added to international instability.
Some think the same is true of the US today. As mainland China supplants the US as the world's largest economy, Beijing's ambition to shape the world will likely bump into Washington's international aspirations.
For some parts of the world, the parallels with the 1920s can seem uncanny. Today, we have populists, competing political systems, and challenges to US leadership. Yes, lots can go right, but we shouldn't be blinded to the things that can go wrong.
First published 27 January 2021.
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