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Real origins of the great depression: monopoly power, unions and the American business cycle in the 1920s

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  • Ebell, Monique
  • Ritschl, Albrecht
Abstract
We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices and moderate increases in real wages.

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  • Ebell, Monique & Ritschl, Albrecht, 2008. "Real origins of the great depression: monopoly power, unions and the American business cycle in the 1920s," Economic History Working Papers 19566, London School of Economics and Political Science, Department of Economic History.
    • Handle: RePEc:ehl:wpaper:19566
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    2. Lee E. Ohanian, 2016. "The Great Recession in the Shadow of the Great Depression: A Review Essay on “Hall of Mirrors: The Great Depression, The Great Recession and the Uses and Misuses Of History”," NBER Working Papers 22239, National Bureau of Economic Research, Inc.
    3. Marco Manacorda, 2012. "The Cost of Grade Retention," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 596-606, May.
    4. Reicher, Christopher Phillip, 2009. "Expectations, monetary policy, and labor markets: lessons from the Great Depression," Kiel Working Papers 1543, Kiel Institute for the World Economy (IfW Kiel).
    5. Klein, Alexander & Otsuy, Keisuke, 2013. "Efficiency, Distortions and Factor Utilization during the Interwar Period," CAGE Online Working Paper Series 147, Competitive Advantage in the Global Economy (CAGE).
    6. Timothy J. Hatton & Mark Thomas, 2012. "Labour Markets in Recession and Recovery: The UK and the USA in the 1920s and 1930s," CEH Discussion Papers 001, Centre for Economic History, Research School of Economics, Australian National University.
    7. Jordan Roulleau‐Pasdeloup & Anastasia Zhutova, 2022. "Labor Market Policies in a Deep Recession: Lessons from Hoover's Policies during the U.S. Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 247-283, February.
    8. Joshua L. Rosenbloom & William A. Sundstrom, 2009. "Labor-Market Regimes in U.S. Economic History," NBER Working Papers 15055, National Bureau of Economic Research, Inc.
    9. Alex Klein & Keisuke Otsu, 2013. "Efficiency, Distortions and Factor Utilization during the Interwar Period," Studies in Economics 1317, School of Economics, University of Kent.
    10. Fabien Tripier, 2009. "Elasticity of factor substitution and the rise in labor's share of income during the Great Depression," Working Papers hal-00419343, HAL.
    11. Timothy J. Hatton & Mark Thomas, 2010. "Labour markets in the interwar period and economic recovery in the UK and the USA," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 26(3), pages 463-485, Autumn.
    12. Erik Bengtsson & Jakob Molinder, 2017. "The economic effects of the 1920 eight-hour working day reform in Sweden," Scandinavian Economic History Review, Taylor & Francis Journals, vol. 65(2), pages 149-168, May.
    13. Hansen, G.D. & Ohanian, L.E., 2016. "Neoclassical Models in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2043-2130, Elsevier.

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    More about this item

    Keywords

    Trade unions; collective bargaining; Great Depression;
    All these keywords.

    JEL classification:

    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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