100 Years Ago this July, a Deep Depression Ended. Why Was it Not ‘Great?’

A few years ago, I read a great book by James Grant, the publisher of Grant’s Interest Rate Observer and a regular CNBC contributor. The book is The Forgotten Depression: 1921: The Crash That Cured Itself. I reviewed it for The Objective Standard in September of 2015. 

Yes. There was a depression in 1920-21, as the country emerged from a wartime, inflation-infected economy. As Grant explains, the Federal Government’s laissez-faire approach to the depression of 1921, under both the Wilson and Harding Administrations, let economic adjustments work themselves out without government intervention. This “hands-off” approach led to a quick end to the economic collapse, and a sharp, job-filled, decade-long, innovation-rich economic expansion followed. This was the exact opposite of the Hoover/FDR approach to the depression of 1929-30, which led to the exact opposite result--a decade+ long Great Depression. I quote from my review:

As Grant observes:

The 1920–21 affair was the 14th business-cycle contraction since the panic year of 1812. Commercial and financial disturbances of one kind or another occurred in 1818, 1825, 1837, 1847, 1857, 1873, 1884, 1890, 1893, 1903, 1907, 1910 and 1913. . . . “In this period of 120 years,” according to a contemporary [congressional] inquest, “the debacle of 1920–21 was without parallel.” (pp. 5–6)

“So depression it was,” Grant concludes. “What would the government do about it?”

It would implement settled doctrine, as governments usually do. In 1920–21, this meant balancing the federal budget, raising interest rates to protect the Federal Reserve’s gold position and allowing prices and wages to find a new, lower level. Critically, what it would not do was what the Hoover administration so energetically attempted to do a decade later: There would be no federally led drive to maintain nominal wage rates and no governmentally orchestrated work sharing. For this reason, not least, no one would wind up affixing the label “great” on the depression of 1920–21. (pp. 71–72)

Nor would many people remember it. 

In a timely article for FEE, The Depression of 1920-1921: Why Historians—and Economists—Often Overlook It, John Phelan explains that the 1921 depression is usually overlooked by both historians and economists. 

Students of macroeconomics will learn about the Great Depression of the 1930s. They will learn that many of the policies routinely used to fight downturns now—fiscal stimulus and expansive monetary policy—were forged in those years. You can earn a degree in economics without ever encountering the Depression of 1920-1921. Yet, initially, it was as bad as that which began in 1929 [and by some measures, by Grant’s assessment, worse] but ended more quickly and was followed by a rapid recovery.

Whereas the policymakers of the 1930s—led by the defeated vice-presidential candidate of 1920, Franklin D. Roosevelt—diagnosed the economic problem facing them as unemployment and deflation, those of 1920 diagnosed it as the preceding inflation. Where policymakers of the 1930s used cheap money and government spending to boost demand, those of the 1920s saw this as simply repeating the errors which had created the initial problem. To them, there could be no true cure that didn’t deal with the disease, rather than the symptoms.

I think, unfortunately, that Phelan is a little soft on the question of why the 1921 depression is usually overlooked by both historians and economists.. He writes:

It is for history to judge who was correct, but it’s undeniable that the recovery of the Depression of 1920–1921 was immensely stronger and faster than that of the Great Depression. Ironically, this may be the very reason it is often overlooked in history and economic courses.

Well, I think 100 years is plenty of time for history to judge. The facts are known. They won’t change. I don’t think it’s ironic that the immensely stronger and faster 1921 recovery is overlooked. I think it’s deliberate. Today’s statist conventional wisdom cannot admit that non-intervention works, and massive government intervention and “stimulus” not only does not work—it makes matters worse. There’s no irony here. Statists control history and economics courses. This is the very reason 1921 is “overlooked,” and the Hoover/FDR Great Depression is the focus! I’m grateful for people like James Grant and John Phelan. We won’t get sound economic policies until history is properly and factually reported and learned.

Related Reading:

The Forgotten Man: A New History of the Great Depression  by Amity Shlaes

Memo to the NJ Star-Ledger: Obama Didn’t Cause the Recovery

Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis—and Why It Could Happen Again—by Peter J. Wallison

THE GREAT DEPRESSION AND THE ROLE OF GOVERNMENT INTERVENTION by Don Watkins for ARI