History of the Federal Reserve System
This article is about the history of the United States Federal Reserve System from its creation to the present. The Federal Reserve System is the third central banking system in United States history; the First Bank of the United States and the Second Bank of the United States each had a 20-year charter. Both banks issued currency, made commercial loans, accepted deposits, purchased securities, maintained multiple branches and acted as fiscal agents for the U. S. Treasury; the U. S. Federal Government was required to purchase 20% of the bank capital stock shares and to appoint 20% of the board members of each of those first two banks "of the United States." Therefore, each bank's majority control was placed squarely in the hands of wealthy investors who purchased the remaining 80% of the stock. These banks were opposed by state-chartered banks, who saw them as large competitors, by many who insisted that they were in reality banking cartels compelling the common man to maintain and support them.
President Andrew Jackson vetoed legislation to renew the Second Bank of the United States, starting a period of free banking. Jackson staked the legislative success of his second presidential term on the issue of central banking. "Every monopoly and all exclusive privileges are granted at the expense of the public, which ought to receive a fair equivalent. The many millions which this act proposes to bestow on the stockholders of the existing bank must come directly or indirectly out of the earnings of the American people," Jackson said in 1832. Jackson's second term in office ended in March 1837 without the Second Bank of the United States's charter being renewed. In 1863, as a means to help finance the Civil War, a system of national banks was instituted by the National Currency Act; the banks each had the power to issue standardized national bank notes based on United States bonds held by the bank. The Act was revised in 1864 and named as the National-Bank Act, or National Banking Act, as it is popularly known.
The administration of the new national banking system was vested in the newly created Office of the Comptroller of the Currency and its chief administrator, the Comptroller of the Currency. The Office, which still exists today and supervises all banks chartered nationally and is a part of the U. S. Treasury Department. National bank currency was considered inelastic because it was based on the fluctuating value of U. S. Treasury bonds. If Treasury bond prices declined, a national bank had to reduce the amount of currency it had in circulation by either refusing to make new loans or by calling in loans it had made already; the related liquidity problem was caused by an immobile, pyramidal reserve system, in which nationally chartered rural/agriculture-based banks were required to set aside their reserves in federal reserve city banks, which in turn were required to have reserves in central city banks. During the planting seasons, rural banks would exploit their reserves to finance full plantings, during the harvest seasons they would use profits from loan interest payments to restore and grow their reserves.
A national bank whose reserves were being drained would replace its reserves by selling stocks and bonds, by borrowing from a clearing house or by calling in loans. As there was little in the way of deposit insurance, if a bank was rumored to be having liquidity problems this might cause many people to remove their funds from the bank; because of the crescendo effect of banks which lent more than their assets could cover, during the last quarter of the 19th century and the beginning of the 20th century, the United States economy went through a series of financial panics. Prior to a severe panic in 1907, there was a motivation for renewed demands for banking and currency reform; the following year, Congress enacted the Aldrich-Vreeland Act which provided for an emergency currency and established the National Monetary Commission to study banking and currency reform. The chief of the bipartisan National Monetary Commission was financial expert and Senate Republican leader Nelson Aldrich. Aldrich set up two commissions – one to study the American monetary system in depth and the other, headed by Aldrich, to study the European central-banking systems and report on them.
Aldrich went to Europe opposed to centralized banking but, after viewing Germany's banking system, he came away believing that a centralized bank was better than the government-issued bond system that he had supported. Centralized banking was met with much opposition from politicians, who were suspicious of a central bank and who charged that Aldrich was biased due to his close ties to wealthy bankers such as J. P. Morgan and his daughter's marriage to Jr.. In 1910, Aldrich and executives representing the banks of J. P. Morgan and Kuhn, Loeb & Co. secluded themselves for ten days at Jekyll Island, Georgia. The executives included Frank A. Vanderlip, president of the National City Bank of New York, associated with the Rockefellers. P. Morgan Company. There, Paul Warburg of Kuhn, Loeb, & Co. directed the proceedings and wrote the primary features of what would be called the Aldrich Plan. Warburg would write that "The matter of a uniform discount rate was discussed and settled at Jekyll Island." Vanderlip wrote in his 1935 autobiography From Farmboy to Financier: Despite my views about the value to society of greater publicity for the affairs of corporations, there was an occasion, near the close of 1910, when I was as secretiv
First Bank of the United States
The President and Company, of the Bank of the United States known as the First Bank of the United States, was a national bank, chartered for a term of twenty years, by the United States Congress on February 25, 1791. It followed the Bank of North America, the nation's first de facto central bank. Establishment of the Bank of the United States was part of a three-part expansion of federal fiscal and monetary power, along with a federal mint and excise taxes, championed by Alexander Hamilton, first Secretary of the Treasury. Hamilton believed a national bank was necessary to stabilize and improve the nation's credit, to improve handling of the financial business of the United States government under the newly enacted Constitution; the First Bank building, located in Philadelphia, within Independence National Historical Park, was completed in 1797, is a National Historic Landmark for its historic and architectural significance. In 1791, the Bank of the United States was one of the three major financial innovations proposed and supported by Alexander Hamilton, first Secretary of the Treasury.
In addition to the national bank, the other measures were an assumption of the state war debts by the U. S. government, establishment of a mint and imposition of a federal excise tax. The goals of Hamilton's three measures were to: Establish financial order and precedence in and of the newly formed United States. Establish credit—both in a country and overseas—for the new nation. Resolve the issue of the fiat currency, issued by the Continental Congress prior to and during the American Revolutionary War—the "Continental". In simpler words, Hamilton's four goals were to: Have the Federal Government assume the Revolutionary War debts of the several states Pay off the war debts Raise money for the new government Establish a national bank and create a common currency According to the plan put before the first session of the First Congress in 1790, Hamilton proposed establishing the initial funding for the First Bank of the United States through the sale of $10 million in stock of which the United States government would purchase the first $2 million in shares.
Hamilton, foreseeing the objection that this could not be done since the U. S. government did not have $2 million, proposed that the government makes the stock purchase using money lent to it by the bank. The remaining $8 million of stock would be available to the public, both in the United States and overseas; the chief requirement of these non-government purchases was that one-quarter of the purchase price had to be paid in gold or silver. Unlike the Bank of England, the primary function of the bank would be a credit issued to government and private interests, for internal improvements and other economic development, per Hamilton's system of Public Credit; the business would be involved in on behalf of the federal government—a depository for collected taxes, making short-term loans to the government to cover real or potential temporary income gaps, serving as a holding site for both incoming and outgoing monies—was considered important but still secondary in nature. There were other, non-negotiable conditions for the establishment of the First Bank of the United States.
Among these were: That the bank would have a twenty-year charter running from 1791 to 1811, after which time it would be up to the Congress to approve or deny renewal of the bank and its charter. That the bank, to avoid any appearance of impropriety, would: be forbidden to buy a government bond. Have a mandatory rotation of directors. Neither issue incur debts beyond its actual capitalization; that foreigners, whether overseas or residing in the United States, would be allowed to be First Bank of the United States stockholders, but would not be allowed to vote. That the Secretary of the Treasury would be free to remove government deposits, inspect the books, require statements regarding the bank's condition as as once a week. To ensure that the government could meet both the current and future demands of its governmental accounts, an additional source of funding was required, "for interest payments on the assumed state debts would begin to fall due at the end of 1791...those payments would require $788,333 annually, and... an additional $38,291 was needed to cover deficiencies in the funds, appropriated for existing commitments."
To achieve this, Hamilton repeated a suggestion he had made nearly a year before—increase the duty on imported spirits, plus raise the excise tax on domestically distilled whiskey and other liquors. Local opposition to the tax led to the Whiskey Rebellion. Hamilton's bank proposal faced widespread resistance from opponents of increased federal power. Secretary of State Thomas Jefferson and James Madison led the opposition, which claimed that the bank was unconstitutional, that it benefited merchants and investors at the expense of the majority of the population. Like most of the Southern members of Congress and Madison opposed a second of the three proposals of Hamilton: establishing an official government Mint, they believed this centralization of power away from local banks was dangerous to a sound monetary system and was to the benefit of business interests in the commercial north, not southern agricultural interests, arguing that the right to own property would be infringed by these proposals.
Furthermore, they contended that the creation of such a bank violated the Constitution, which stated that Congress was to regulate weights
Law of the United States
The law of the United States comprises many levels of codified and uncodified forms of law, of which the most important is the United States Constitution, the foundation of the federal government of the United States. The Constitution sets out the boundaries of federal law, which consists of Acts of Congress, treaties ratified by the Senate, regulations promulgated by the executive branch, case law originating from the federal judiciary; the United States Code is the official compilation and codification of general and permanent federal statutory law. Federal law and treaties, so long as they are in accordance with the Constitution, preempt conflicting state and territorial laws in the 50 U. S. in the territories. However, the scope of federal preemption is limited because the scope of federal power is not universal. In the dual-sovereign system of American federalism, states are the plenary sovereigns, each with their own constitution, while the federal sovereign possesses only the limited supreme authority enumerated in the Constitution.
Indeed, states may grant their citizens broader rights than the federal Constitution as long as they do not infringe on any federal constitutional rights. Thus, most U. S. law consists of state law, which can and does vary from one state to the next. At both the federal and state levels, with the exception of the state of Louisiana, the law of the United States is derived from the common law system of English law, in force at the time of the American Revolutionary War. However, American law has diverged from its English ancestor both in terms of substance and procedure, has incorporated a number of civil law innovations. In the United States, the law is derived from five sources: constitutional law, statutory law, administrative regulations, the common law. Where Congress enacts a statute that conflicts with the Constitution, state or federal courts may rule that law to be unconstitutional and declare it invalid. Notably, a statute does not automatically disappear because it has been found unconstitutional.
Many federal and state statutes have remained on the books for decades after they were ruled to be unconstitutional. However, under the principle of stare decisis, no sensible lower court will enforce an unconstitutional statute, any court that does so will be reversed by the Supreme Court. Conversely, any court that refuses to enforce a constitutional statute will risk reversal by the Supreme Court. Commonwealth countries are heirs to the common law legal tradition of English law. Certain practices traditionally allowed under English common law were expressly outlawed by the Constitution, such as bills of attainder.</ref> and general search rrts. As common law courts, U. S. courts have inherited the principle of stare decisis. American judges, like common law judges elsewhere, not only apply the law, they make the law, to the extent that their decisions in the cases before them become precedent for decisions in future cases; the actual substance of English law was formally "received" into the United States in several ways.
First, all U. S. states except Louisiana have enacted "reception statutes" which state that the common law of England is the law of the state to the extent that it is not repugnant to domestic law or indigenous conditions. Some reception statutes impose a specific cutoff date for reception, such as the date of a colony's founding, while others are deliberately vague. Thus, contemporary U. S. courts cite pre-Revolution cases when discussing the evolution of an ancient judge-made common law principle into its modern form, such as the heightened duty of care traditionally imposed upon common carriers. Second, a small number of important British statutes in effect at the time of the Revolution have been independently reenacted by U. S. states. Two examples are the Statute of 13 Elizabeth; such English statutes are still cited in contemporary American cases interpreting their modern American descendants. Despite the presence of reception statutes, much of contemporary American common law has diverged from English common law.
Although the courts of the various Commonwealth nations are influenced by each other's rulings, American courts follow post-Revolution Commonwealth rulings unless there is no American ruling on point, the facts and law at issue are nearly identical, the reasoning is persuasive. Early on, American courts after the Revolution did cite contemporary English cases, because appellate decisions from many American courts were not reported until the mid-19th century. Lawyers and judges used English legal materials to fill the gap. Citations to English decisions disappeared during the 19th century as American courts developed their own principles to resolve the legal problems of the American people; the number of published volumes of American reports soared from eighteen in 1810 to over 8,000 by 1910. By 1879 one of the delegates to the California constitutional convention was complaining: "Now, when we require them to state the reasons for a decision, we do not mean they shall write a hundred pages of detail.
We not mean that they shall include the small cases, impose on the country all this fine judici
History of central banking in the United States
This history of central banking in the United States encompasses various bank regulations, from early "wildcat" practices through the present Federal Reserve System. Some Founding Fathers were opposed to the formation of a central banking system. Others were in favor of a central bank. Robert Morris, as Superintendent of Finance, helped to open the Bank of North America in 1782, has been accordingly called by Thomas Goddard "the father of the system of credit and paper circulation in the United States." As ratification in early 1781 of the Articles of Confederation had extended to Congress the sovereign power to generate bills of credit, it passed that year an ordinance to incorporate a subscribed national bank following in the footsteps of the Bank of England. However, it was thwarted in fulfilling its intended role as a nationwide central bank due to objections of "alarming foreign influence and fictitious credit", favoritism to foreigners and unfair policies against less corrupt state banks issuing their own notes, such that Pennsylvania's legislature repealed its charter to operate within the Commonwealth in 1785.
In 1791, former Morris aide and chief advocate for Northern mercantile interests, Alexander Hamilton, the Secretary of the Treasury, accepted a compromise with the Southern lawmakers to ensure the continuation of Morris's Bank project. As a result, the First Bank of the United States was chartered by Congress within the year and signed by George Washington soon after; the First Bank of the United States was modeled after the Bank of England and differed in many ways from today's central banks. For example, it was owned by foreigners, who shared in its profits, it was not responsible for the country's supply of bank notes. It was responsible for only 20% of the currency supply. Several founding fathers bitterly opposed the Bank. Thomas Jefferson saw it as an engine for speculation, financial manipulation, corruption. In 1811 its twenty-year charter was not renewed by Congress. Absent the federally chartered bank, the next several years witnessed a proliferation of federally issued Treasury Notes to create credit as the government struggled to finance the War of 1812.
After five years, the federal government chartered its successor, the Second Bank of the United States. James Madison signed the charter with the intention of stopping runaway inflation that had plagued the country during the five-year interim, it was a copy of the First Bank, with branches across the country. Andrew Jackson, who became president in 1828, denounced the bank as an engine of corruption, his destruction of the bank was a major political issue in the 1830s and shaped the Second Party System, as Democrats in the states opposed banks and Whigs supported them. He refused to renew its charter. Jackson attempted to counteract this by executive order requiring all Federal land payments to be made in gold or silver; this produced the Panic of 1837. In this period, only state-chartered banks existed, they could issue bank notes against specie and the states regulated their own reserve requirements, interest rates for loans and deposits, the necessary capital ratio etc. These banks had existed in parallel with the Banks of the United States.
The Michigan Act allowed the automatic chartering of banks that would fulfill its requirements without special consent of the state legislature. This legislation made creating unstable banks easier by lowering state supervision in states that adopted it; the real value of a bank bill was lower than its face value, the issuing bank's financial strength determined the size of the discount. By 1797 there were 24 chartered banks in the U. S.. During the free banking era, the banks were short-lived compared to today's commercial banks, with an average lifespan of five years. About half of the banks failed, about a third of which went out of business because they could not redeem their notes. During the free banking era, some local banks took over the functions of a central bank. In New York, the New York Safety Fund provided deposit insurance for member banks. In Boston, the Suffolk Bank guaranteed that bank notes would trade at near par value, acted as a private bank note clearinghouse; the National Banking Act of 1863, besides providing loans in the Civil War effort of the Union, included provisions: To create a system of national banks.
They were to have higher standards concerning reserves and business practices than state banks. Recent research indicates; the office of Comptroller of the Currency was created to supervise these banks. To create a uniform national currency. To achieve this, all national banks were required to accept each other's currencies at par value; this eliminated the risk of loss in case of bank default. The notes were printed by the Comptroller of the Currency to ensure uniform quality and prevent counterfeiting. To finance the war, national banks were required to secure their notes by holding Treasury securities, enlarging the
The Bank of Amsterdam was an early bank, vouched for by the city of Amsterdam, established in 1609, the precursor to, if not the first, modern central bank. During the last decade of the Republic of the United Provinces, in 1790, the premium on the Bank's money disappeared, by the end of the year it had declared itself insolvent; the City of Amsterdam took over the control in 1791. After the creation of the Kingdom of the Netherlands in 1815, the bank was finally closed in 1819, its function was taken over by the Nederlandsche Bank, founded in 1814. In Renaissance Europe, the currency of small states—such as Genoa, Hamburg and Nuremberg—consisted in large part of the currencies of neighboring nations; the foreign money and worn, lowered the value of a country's currency. A country's own freshly minted money, bore an agio, being worth more than its stock currency. Furthermore, it was melted as soon as it was released, its metallic content being worth more than its nominal value. In order to remedy this situation, a bank was founded in 1609 under the protection of the city of Amsterdam.
This bank at first received both foreign and local coinage at their real, intrinsic value, deducted a small coinage and management fee, credited clients in its book for the remainder. This credit was known as bank money. Being always in accord with mint standards, always of the same value, bank money was worth more than real coinage. At the same time a new regulation was introduced; this both removed all uncertainty from these bills and compelled all merchants to keep an account with the bank, which in turn occasioned a certain demand for bank money. Bank money had several distinct advantages over other forms of money, it was secure from fire and other accidents. Furthermore, it was of a known, superior quality; because of the above it bore an agio. Consequentially, it was not that clients asked for their money to be extracted from the bank. A shilling freshly minted would buy no more than a worn one, it was better for clients to sell the debt the bank owed them—their credit—at the market, earning a premium, the expression of the aforementioned agio.
Deposits of coin constituted but a small part of bank capital. Most of the bank's capital originated with deposits of gold and silver bullion, intrinsically of higher value as bullion was not debased, unlike most of the circulating coinage; the Bank of Amsterdam gave credit for deposits of gold and silver worth about 5 percent less than their mint price. It granted the depositor a receipt, which allowed him to claim his deposit 6 months upon returning to the bank the same value of bank money for which credit was given, payment of a fee for the keeping—a warehouse rent of sorts—worth 0.25% for silver, 0.5% for gold. This fee could, of course, be paid every 6 months; the difference of fees has been attributed both to the difficulty of ascertaining the purity of gold and to a wish to encourage deposits of silver, it being the standard metal of the time. If a depositor did not claim his deposit back after six months, it fell to the bank, the depositor was left with the credit he received in compensation.
The terms of deposit were such that deposits of bullion were most made when the price was somewhat lower than ordinary, taken out again when it rose. The proportions between the bank price, the mint price, the market price of gold bullion were always nearly the same. A person could sell his receipt for the difference between the mint price of bullion and the market price; as a receipt was nearly always worth something, it was only that deposits were allowed to fall to the bank through the expiration of receipts. This happened more with regard to gold, due to its higher keeping fee; the bank took in coin, granting credit and receipts in exchange, charging 0.25% for the keeping. These receipts were of no value and the deposit was allowed to fall to the bank; the bank maintained it did not lend any of the bullion deposited in it, not that part for which the receipts expired, which could not be claimed. When a holder of a receipt found himself in need of coinage, he could sell his receipt. Alternatively, when a holder of bank money found himself in need of bullion, he could buy a receipt.
Receipts and credit were thus bought and sold. When a holder of a receipt wished to take out the bullion for which it stood, he had to purchase enough bank credit to do so; the holder of a receipt, when he purchased bank money, purchased the power of taking out a quantity of bullion, of which the mint price is five per cent above the bank price. The agio of five per cent therefore, which he paid for it, was paid not for an imaginary but for a real value; the owner of bank money, when he purchased a receipt, purchased the power of taking out a quantity of bullion of which the market price is from two to three per cent above the mint price. The price of the receipt, the price of the bank money, made up between them the full value of the bullion; the bank allowed no withdrawal except by means of a receipt. There was, more bank money available than the combined value of all receipts – because some receipts
Federal Reserve Board of Governors
The Board of Governors of the Federal Reserve System known as the Federal Reserve Board, is the main governing body of the Federal Reserve System. It is charged with overseeing the Federal Reserve Banks and with helping implement the monetary policy of the United States. Governors are appointed by the President of the United States and confirmed by the Senate for staggered 14-year terms. By law, the appointments must yield a "fair representation of the financial, agricultural and commercial interests and geographical divisions of the country"; as stipulated in the Banking Act of 1935, the Chair and Vice Chair of the Board are two of seven members of the Board of Governors who are appointed by the President from among the sitting Governors. The terms of the seven members of the Board span multiple congressional terms. Once a member of the Board of Governors is appointed by the president, he or she functions independently; the Board is required to make an annual report of operations to the Speaker of the U.
S. House of Representatives, it supervises and regulates the operations of the Federal Reserve Banks, the U. S. banking system in general. The Board obtains its funding from charges that it assesses on the Federal Reserve Banks, not from the federal budget. Membership is by statute limited in term, a member that has served for a full 14 year term is not eligible for reappointment. There are numerous occasions where an individual was appointed to serve the remainder of another member's uncompleted term, has been reappointed to serve a full 14-year term. Since "upon the expiration of their terms of office, members of the Board shall continue to serve until their successors are appointed and have qualified", it is possible for a member to serve for longer than a full term of 14 years; the law provides for the removal of a member of the Board by the President "for cause". The Chair and Vice Chair of the Board of Governors are appointed by the President from among the sitting Governors, they both serve a four-year term and they can be renominated as many times as the President chooses, until their terms on the Board of Governors expire.
All seven board members of the Federal Reserve Board of Governors and five Federal Reserve Bank presidents direct the open market operations that sets U. S. monetary policy through their membership in the Federal Open Market Committee. Records of the Federal Reserve Board of Governors are found in the Record Group n. 82 at the National Archives of the United States. The current members of the Board of Governors are as follows: *Indicates the date of term expiration for the individual nominated to this vacant position. President Donald Trump had nominated Marvin Goodfriend and Nellie Liang to fill the remaining two vacancies. Mr. Goodfriend and Ms. Liang never received a Senate vote. Liang withdrew herself as a nominee on January 7, 2019, after months passed without the Republican-led Senate granting her a hearing. Trump nominated Stephen Moore and Herman Cain. Source: Source: Federal Reserve List of Governors Nomination hearings for Chairmen and Members of the Board of Governors of the Federal Reserve System Public Statements of Federal Reserve Board Members and Chairmen Minutes of Meetings of the Board of Governors of the Federal Reserve System Works by the Board of Governors This article incorporates public domain material from websites or documents of the National Archives and Records Administration
Depression of 1920–21
The Depression of 1920–21 was a sharp deflationary recession in the United States and other countries, beginning 14 months after the end of World War I. It lasted from January 1920 to July 1921; the extent of the deflation was not only large, but large relative to the accompanying decline in real product. There was a brief post–World War I recession following the end of the war which lasted for 2 years, complicating the absorption of millions of veterans into the economy; the economy started to grow, but it had not yet completed all the adjustments in shifting from a wartime to a peacetime economy. Factors identified as contributing to the downturn include returning troops, which created a surge in the civilian labor force and problems in absorbing the veterans. Following the end of the depression, the Roaring Twenties brought a temporary period of economic prosperity; the recession lasted from January 1920 to July 1921, or 18 months, according to the National Bureau of Economic Research. This was longer than most post–World War I recessions, but was shorter than recessions of 1910–12 and 1913–1914.
It was shorter than the Great Depression. Estimates for the decline in Gross National Product vary; the U. S. Department of Commerce estimates that GNP declined 6.9%, Nathan Balke and Robert J. Gordon estimate a decline of 3.5%, Christina Romer estimates a decline of 2.4%. There is no formal definition of economic depression, but two informal rules are a 10% decline in GDP or a recession lasting more than three years, the unemployment rate climbing above 10%; the recession of 1920–21 was characterized by extreme deflation, the largest one-year percentage decline in around 140 years of data. The Department of Commerce estimates 18% deflation and Gordon estimate 13% deflation, Romer estimates 14.8% deflation. Wholesale prices fell the most severe drop since the American Revolutionary War; this is worse than any year during the Great Depression. The deflation of 1920–21 was extreme in absolute terms, unusually extreme given the small decline in gross domestic product. Unemployment rose during the recession.
Romer estimates a rise to 8.7% from 5.2% and an older estimate from Stanley Lebergott says unemployment rose from 5.2% to 11.7%. Both agree that unemployment fell after the recession, by 1923 had returned to a level consistent with full employment. During the recession, there was an sharp decline in industrial production. From May 1920 to July 1921, automobile production declined by 60% and total industrial production by 30%. At the end of the recession, production rebounded. Industrial production returned to its peak levels by October 1922; the AT&T Index of Industrial Productivity showed a decline of 29.4%, followed by an increase of 60.1%—by this measure, the recession of 1920–21 had the most severe decline and most robust recovery of any recession between 1899 and the Great Depression. Using a variety of indexes, Victor Zarnowitz found the recession of 1920–21 to have the largest drop in business activity of any recession between 1873 and the Great Depression. Stocks fell during the recession.
The Dow Jones Industrial Average reached a peak of 119.6 on November 3, 1919, two months before the recession began. The market bottomed on August 24, 1921, at 63.9, a decline of 47%. The climate was terrible for businesses—from 1919 to 1922 the rate of business failures tripled, climbing from 37 failures to 120 failures per every 10,000 businesses. Businesses that avoided bankruptcy saw a 75% decline in profits. Factors that economists have pointed to as causing or contributing to the downturn include troops returning from the war, which created a surge in the civilian labor force and more unemployment and wage stagnation. Adjusting from war time to peacetime was an enormous shock for the U. S. economy. Factories focused on wartime production had to retool their production. A short recession occurring in the United States following Armistice Day was followed by a growth spurt; the recession that occurred in 1920, was affected by the adjustments following the end of the war the demobilization of soldiers.
One of the biggest adjustments was the re-entry of soldiers into the civilian labor force. In 1918, the Armed Forces employed 2.9 million people. This fell to 1.5 million in 1919 and 380,000 by 1920. The effects on the labor market was most striking in 1920, when the civilian labor force increased by 1.6 million people, or 4.1%, in a single year.. In the early 1920s, both prices and wages changed more than today. Employers may have been quicker to offer reduced wages to returning troops, hence lowering their production costs, lowering their prices. During World War I, labor unions had increased their power—the government had great need for goods and s