The Depression You’ve Never Heard Of: 1920-1921
When it comes to diagnosing the causes of the Great Depression and prescribing cures for our present recession, the pundits and economists from the biggest schools typically argue about two different types of intervention. Big-government Keynesians, such as Paul Krugman, argue for massive fiscal stimulus—that is, huge budget deficits—to fill the gap in aggregate demand. On the other hand, small-government monetarists, who follow in the laissez-faire tradition of Milton Friedman, believe that the Federal Reserve needs to pump in more money to prevent the economy from falling into deep depression. Yet both sides of the debate agree that it would be utter disaster for the government and Fed to stand back and allow market forces to run their natural course after a major stock market or housing crash.
In contrast, many Austrian economists reject both forms of intervention. They argue that the free market would respond in the most efficient manner possible after a major disruption (such as the 1929 stock market crash or the housing bubble in our own times). As we shall see, the U.S. experience during the 1920–1921 depression—one that the reader has probably never heard of—is almost a laboratory experiment showcasing the flaws of both the Keynesian and monetarist prescriptions.
The 1929–1933 Great Contraction
Despite what many readers undoubtedly “learned” in their history classes as children, Herbert Hoover behaved like a textbook Keynesian following the 1929 stock market crash. In conjunction with Treasury Secretary Andrew Mellon, Hoover achieved an across-the-board one percentage point reduction in income tax rates applicable to the 1929 tax year.
Hoover didn’t stop with tax cuts to bolster “aggregate demand”—though analysts at that time would not have used the term. He also signed into law massive increases in the federal budget, with fiscal year (FY) 1932 spending rising 42 percent above 1930 levels. Hoover ran unprecedented peacetime deficits, which stood in sharp contrast to his predecessor Calvin Coolidge, who had run a budget surplus every year of his presidency. In fact, in the 1932 election FDR campaigned on a balanced budget and excoriated the reckless spending record of the Republican incumbent.
It wasn’t merely that Hoover spent a bunch of money. He spent it on just the types of things that we associate today with Roosevelt’s New Deal. For example, he signed off on numerous public-works projects, including the Hoover Dam. Of particular relevance today is the Reconstruction Finance Corporation (RFC) established under Hoover, which quickly injected more than $1 billion to prop up troubled banks that had made bad loans during the boom years of the late 1920s—and this was when $1 billion really meant something.
It is true that Hoover eventually blinked and raised taxes in 1932, in an effort to reduce the federal budget deficit. Today’s Keynesians point to this move as proof that reducing deficits is a bad idea in the middle of a depression. Yet an equally valid interpretation is that it’s horrible to hike tax rates in the middle of an economic disaster. After the bold tax cuts pushed through by Andrew Mellon in the 1920s, the top marginal income-tax rate in 1932 stood at 25 percent. The next year, because of Hoover’s desire to close the budget hole, the top income tax rate was 63 percent. Given this extraordinary single-year rate hike, it is no wonder that 1933 was the single worst year in U.S. economic history. (For what it’s worth, the FY 1933 budget deficit was still huge, coming in at 4.5 percent of GDP. Despite the huge rate hikes, federal tax revenues only increased 3.8 percent from FY 1932 to FY 1933.)
So we see that the standard Keynesian story, which paints Herbert Hoover as a do-nothing liquidationist, is completely false. Yet Milton Friedman’s explanation for the Great Depression is almost as dubious. Following the stock market crash, the New York Federal Reserve Bank immediately slashed its discount rate—how much it charged on loans—in an attempt to provide relief to the beleaguered financial system. The New York Fed continued to slash its discount rate over the next two years, pushing it down to 1.5 percent by May 1931. At that time, this was the lowest discount rate the New York Fed had ever charged since the establishment of the Federal Reserve System in 1913.
It wasn’t merely that the Fed (along with other central banks around the world) was charging an unusually low rate on loans it advanced from its discount window. The entire mentality of central bankers was different during the early years of the Great Depression. Writing in 1934, Lionel Robbins first noted that during previous crises, the solution had been for central banks to charge a high discount rate to separate the wheat from the chaff. Those firms that were truly solvent but illiquid would be willing to pay the high interest rates on central-bank loans to get them through the storm. Firms that were simply insolvent, on the other hand, would know the jig was up because they couldn’t afford the high rates. Yet this tough love was not administered after the 1929 crash, as Robbins explained: “In the present depression we have changed all that. We eschew the sharp purge. We prefer the lingering disease. Everywhere, in the money market, in the commodity markets and in the broad field of company finance and public indebtedness, the efforts of Central Banks and Governments have been directed to propping up bad business positions.”
We therefore see an eerie pattern. When it came to both fiscal and monetary policy during the early 1930s, the governments and central banks implemented the same strategies that the sophisticated experts recommend today for our present crisis. Of course, today’s Keynesians and monetarists have a ready retort: They will tell us that their prescribed medicines (deficits and monetary injections, respectively) were not administered in large enough doses. It was the timidity of Hoover’s deficits (for the Keynesians) or the Fed’s injections of liquidity (for the monetarists) that caused the Great Depression.
The 1920–1921 Depression
This context highlights the importance of the 1920–1921 depression. Here the government and Fed did the exact opposite of what the experts now recommend. We have just about the closest thing to a controlled experiment in macroeconomics that one could desire. To repeat, it’s not that the government boosted the budget at a slower rate, or that the Fed provided a tad less liquidity. On the contrary, the government slashed its budget tremendously, and the Fed hiked rates to record highs. We thus have a fairly clear-cut experiment to test the efficacy of the Keynesian and monetarist remedies.
At the conclusion of World War I, U.S. officials found themselves in a bleak position. The federal debt had exploded because of wartime expenditures, and annual consumer price inflation rates had jumped well above 20 percent by the end of the war.
To restore fiscal and price sanity, the authorities implemented what today strikes us as incredibly “merciless” policies. From FY 1919 to 1920, federal spending was slashed from $18.5 billion to $6.4 billion—a 65 percent reduction in one year. The budget was pushed down the next two years as well, to $3.3 billion in FY 1922.
On the monetary side, the New York Fed raised its discount rate to a record high 7 percent by June 1920. Now the reader might think that this nominal rate was actually “looser” than the 1.5 percent discount rate charged in 1931 because of the changes in inflation rates. But on the contrary, the price deflation of the 1920–1921 depression was more severe. From its peak in June 1920 the Consumer Price Index fell 15.8 percent over the next 12 months. In contrast, year-over-year price deflation never even reached 11 percent at any point during the Great Depression. Whether we look at nominal interest rates or “real” (inflation-adjusted) interest rates, the Fed was very “tight” during the 1920–1921 depression and very “loose” during the onset of the Great Depression.
Now some modern economists will point out that our story leaves out an important element. Even though the Fed slashed its discount rate to record lows during the onset of the Great Depression, the total stock of money held by the public collapsed by roughly a third from 1929 to 1933. This is why Milton Friedman blamed the Fed for not doing enough to avert the Great Depression. By flooding the banking system with newly created reserves (part of the “monetary base”), the Fed could have offset the massive cash withdrawals of the panicked public and kept the overall money stock constant.
But even this nuanced argument fails to demonstrate why the 1929–1933 downturn should have been more severe than the 1920–1921 depression. The collapse in the monetary base (directly controlled by the Fed) during 1920–1921 was the largest in U.S. history, and it dwarfed the fall during the early Hoover years. So we hit the same problem: The standard monetarist explanation for the Great Depression applies all the more so to the 1920–1921 depression.
The Results
If the Keynesians are right about the Great Depression, then the depression of 1920–1921 should have been far worse. The same holds for the monetarists; things should have been awful in the 1920s if their theory of the 1930s is correct.
To be sure, the 1920–1921 depression was painful. The unemployment rate peaked at 11.7 percent in 1921. But it had dropped to 6.7 percent by the following year, and was down to 2.4 percent by 1923. After the depression the United States proceeded to enjoy the “Roaring Twenties,” arguably the most prosperous decade in the country’s history. Some of this prosperity was illusory—itself the result of subsequent Fed inflation—but nonetheless the 1920–1921 depression “purged the rottenness out of the system” and provided a solid framework for sustainable growth.
As we know, things turned out decidedly differently in the 1930s. Despite the easy fiscal and monetary policies of the Hoover administration and the Federal Reserve—which today’s experts say are necessary to avoid the “mistakes of the Great Depression”—the unemployment rate kept going higher and higher, averaging an astounding 25 percent in 1933. And of course, after the “great contraction” the U.S. proceeded to stagnate in the Great Depression of the 1930s, which was easily the least prosperous decade in the country’s history.
The conclusion seems obvious to anyone whose mind is not firmly locked into the Keynesian or monetarist framework: The free market works. Even in the face of massive shocks requiring large structural adjustments, the best thing the government can do is cut its own budget and return more resources to the private sector. For its part, the Federal Reserve doesn’t help matters by flooding the shell-shocked credit markets with green pieces of paper. Prices can adjust to clear labor and other markets soon enough, in light of the new fundamentals, if only the politicians and central bankers would get out of the way.
Pingback by Monsieur Bastiat, Call Your Office | The Freeman | Ideas On Liberty on 18 November 2009:
[...] that one, unlike the Great Depression, was what W. S. Gilbert might have called a short sharp shock. Robert Murphy describes the depression history [...]
Comment by Lee Waaks on 25 November 2009:
I think Mr. Murphy is right to point to the 1920-21 recession as an embarrassment for Keynesians but I’m not so sure if it should be embarrassing for Monetarists (and neo-Austrians) too. As Murphy points out, the 1920-21 recession was painful and, no doubt, some of the pain can be attributed to the reallocation of capital and labor necessary after the collapse. But is it the case that all of the pain must be attributed to malinvestment? Is it not possible that a monetary expansion in response to the increased demand for money might have helped avoid such a painful contraction? After all, the massive reallocation of labor and capital required at the end of WWII did not lead to another Great Depression (as some Keynesians predicted).
Comment by Jonathan Finegold Catalán on 25 November 2009:
Lee Wacks,
Interesting question that I probably couldn’t help to accurately answer. The Federal Reserve actually willingly increased interest rates during the 1920-21 depression (increased reserved ratios). If you agree that meeting the demand for money would have helped, then surely purposefully decreasing the money supply should have been harmful. But, the effects were not so harmful as to seriously postpone a recovery after the initial crash.
On the other hand, to be fair I am not as read up on the “free banker’s” arguments on why banks should expand the money supply to meet demand for money.
Comment by Andrew Lynch on 25 November 2009:
Fantastic article. It’s not so technical that I can’t share it with my mom. I’m also in the middle of reading your Politically Incorrect Guide to the Great Depression…
Terrific stuff. Always look forward to your perspectives.
Comment by Dave true liberal on 2 December 2009:
You do fantastic work Mr. Murphy! I have been studying the 1920 depression and the great depression and you have helped people really understand there are alternatives that perhaps are more efficient when dealing with a depression. The elites just cannot stand doing nothing. Their greed for power and control over the masses just cannot be contained…sadly…
“Fascism entirely agrees with Mr. Maynard Keynes… so far as it goes, serve as a useful introduction to fascist economics. There is scarcely anything to object to in it and there is much to applaud” Benito Mussolini
In a laudatory review of Roosevelt’s 1933 book Looking Forward, Mussolini wrote, “Reminiscent of Fascism is the principle that the state no longer leaves the economy to its own devices.… Without question, the mood accompanying this sea change resembles that of Fascism.”
Comment by Daniel Kuehn on 3 December 2009:
How in the world does waiting three years for substantial deficit spending count as “textbook Keynesianism”????
Hoover isn’t the caricature that a lot of historians make him – I agree with that completely. But this story that Hoover was a Keynesian deficit spender is ridiculous – I don’t know how this meme got started or how it has survived.
Anyway – the main point is 1920-21. Murphy demonstrates that along with Thomas Woods he has no concept of what his opponents advocate. Keynesians argue that fiscal stimulus is only appropriate in a deflationary situation with extremely low interest rates – in other words, in a liquidity trap that create prolonged depression. In 1920 inflation was high and interest rates were high – and the following recession was CAUSED by raising rates and popping the bubble, just like Volcker did in the 1980s. It doesn’t invalidate anything about Keynesianism because Keynesianism doesn’t speak to the 1920 recession, because there was no liquidity trap and no collapse in aggregate demand in 1920!!!!! Keynes predicted prolonged depression that could be remedied by fiscal stimulus under very specific conditions, and those conditions just plain didn’t apply in the U.S. in 1920-21.
This obsession with 1920-21 is bizarre. 1920-21 strongly confirms the monetarist position, and it also is perfectly consistent with the Keynesian position (although somewhat less relevant for the reasons I stated above).
I don’t know why it’s so hard for Austrians/libertarians to comprehend this. You just don’t get it, Murphy.
Comment by joe on 12 December 2009:
so, does anyone have a good counterargument to D. Kuehn?
Comment by cavalier973 on 13 December 2009:
a discussion of the “liquidity trap” concept: http://mises.org/daily/3697
Comment by Jonathan Finegold Catalán on 4 January 2010:
Daniel Kuehn,
I apologize if it seems that I am stocking you! I seem to reply to your posts on Café Hayek, the Ludwig von Mises Institute and now on the Freeman! Admittedly, I have wanted to write a reply for quite some time now, but either never got around to it or completely forgot about it.
First, I am not sure what you are trying to say about Herbert Hoover. That he did not spend as much as Roosevelt, surely not, but to say that he was not a heavy spender and he did not spend in ways which Keynes would later agree with would be patently false. Hoover, up to him, was the greatest peacetime spender in the history of the United States, so let us keep our history straight.
Second, I am not sure what your point is in regard to the depression of 1921. Interest rates were raised after the crash, which absolutely goes contrary to the monetarist position of providing excess liquidity to a shrinking credit bubble. In regards to Keynesian theory, I am not sure you are completely correct in suggesting that Keynesians only support expansionary fiscal policies during a liquidity trap. There is no use regurgitating the same argument I have elsewhere, and so I will not delve further into this particular point (for those unaware, Mr. Kuehn and I are discussing a similar topic elsewhere).
That said, I would definitely be interested in hearing a much better supported version of your argument.
Pingback by Economy Sheds 85,000 Jobs in December | The Freeman | Ideas On Liberty on 8 January 2010:
[...] Timely Classic: “The Depression You Never Heard of: 1920-1921” by Robert P. [...]
Pingback by Trichet, tipos de interés, crisis (a modo de comentario a Cuadernos Keynesianos) « Procesos de aprendizaje on 7 February 2010:
[...] aumento intenso del desempleo. Ver gráfico del IPC. Según lo escrito por Robert Murphy (aquí y aquí) y Thomas Woods (aquí en video y aquí) sobre este desconocido periodo, lejos de bajar los tipos [...]
Pingback by The Lesson of Warren Harding Revisited « Mellon's Musings on 23 February 2010:
[...] For America was coming out of World War I. Government was controlling huge swaths of the economy, as it had mobilized land, labor and capital towards war production and away from normal commerce as dictated by consumer demand. In addition to the mass of resources that needed to be reallocated according to market forces, the economy had been further distorted due to the policies of the Federal Reserve which had inflated the money supply by 71% from 1913-1919 (while the physical volume of business had only increased by 9.6%), and whose policies had led to an increase in prices of a staggering 234% between 1914 and 1920. Prices needed to readjust according to the reallocation of resources. In addition, not surprisingly, due to the costs of war, the federal budget had grown to $18.5bn. [...]
Pingback by Links for Federalist Society Debate on the Federal Reserve on 23 March 2010:
[...] Finally, in the talk I alluded to the 1920-1921 depression, in which the federal government cut the budget tremendously and in which the Fed hiked rates to [...]
Pingback by Progressive Pile-Up On the Austrians!! on 8 April 2010:
[...] that when Tom Woods and I cite our favorite counterexample to the monetarists and Keynesians, it is the 1920-1921 depression. [...]
Pingback by Calvin Coolidge - 30th US President on 30 May 2010:
[...] [...]
Pingback by ¿Debilitan los salarios rígidos la defensa de los mercados? - Mises Daily en español on 8 June 2010:
[...] relativamente libre, incluso al afrontar grandes alteraciones en la economía consideremos la depresión de 1920-21. Desde su máximo en junio de 1920, el Índice de Precios del Consumo cayó un [...]
Comment by Jerome on 9 June 2010:
Hi Robert
You are saying ‘The next year [1932], because of Hoover’s desire to close the budget hole, the top income tax rate was 63 percent. Given this extraordinary single-year rate hike, it is no wonder that 1933 was the single worst year in U.S. economic history.’
Indeed the top income tax rate was hiked massively in June 1932. But come on, how can you say that ’1933 was the single worst year in U.S. economic history’? That is either a blatant lie, or just a genuine mistake.
1933 GDP contraction estimates range between -1% and -4% (depending on the USD index you will use). In comparison
In 1932 GDP contracted between -13% and -23%
In 1931 GDP contracted between -6% and -16%
In 1930 GDP contracted between -8.50% and -12%
And surprisingly 1934 GDP expanded between 11% and 17%. If tax rates hikes had such a massive effect, wouldn’t you expect this effect to be long-lasting?
You can check all that here http://www.housingbubblebust.com/GDP/Depression.html
Therefore it would rather seem that hiking top-marginal tax rate have hardly any effect on an economy. This top-marginal tax rate was hiked once again in 1936 to 79% (and indeed there was a dip back into recession in 1937) but then reached 92% and averaged 88% between 1936 and 1980. Was there any other Great Depression? No. Actually quite the contrary. The US managed to build up the very first mass-consumption and mass-production economy in human history. Not only was that the best economy in the world, but the levels of social inequality kept contracting from their top in 1929 to reach a low ebb in the middle of the 1970s. If that is not a success story, I am wondering what it is.
Can you say the same thing about that economy post-1980 when this top-marginal income tax was once again lowered to 22%? A succession of boom and bust has made it what it is today, a complete mess which is dragging the whole world down to hell.
Comment by Jerome on 9 June 2010:
Robert,
Tell me if I am wrong. You are trying to show that thanks to the steep reaction of the authorities, the market managed to reach an equilibrium in 1921, hence the roaring ’20s. Hence you are saying that letting markets act freely is a better solution than intervention (except that you assume they indeed intervened, even though not in a Keynesian way).
But it seems to me that you are not interpreting the chronology correctly. There were a lot of problems in the economy after WWI (and notably a work force overhang created by demobilised soldiers). On top of that the Fed started hiking rates as you said and the Fed Fund reached 7% at the exact same moment where the CPI peaked. From that point the US economy collapsed into this deflationary depression. So first point: you cannot be sure about what would have happened if the Fed had kept from intervening. Not only that was clearly not a free market mecanism, but a Fed-led contraction, but it even seems that this so-called ‘Austrian’ approach itself triggered the problem.
Now what about the roaring ’20s? which you seem to suggest were the great result of the Austrian cleaning mecanism of the 20-21 depression. Well the only problem with that is you forget to specify that the Fed and the government intervened again in 1921 and this time the other way round. They adopted a whole range of Keynesian style measures and you know what? the exact same sort of measure Hoover took 10 years later in 1930 that you are saying prolonged the Great Depression. Wikipedia explains ‘About 300 eminent members of industry, banking and labor were called together in September 1921 to discuss the problem of unemployment. Hoover organized the economic conference and a committee on unemployment. The committee established a branch in every state having substantial unemployment, along with sub-branches in local communities and mayors’ emergency committees in 31 cities. The committee contributed relief to the unemployed, and also organized collaboration between the local and federal governments.’
Fed slashed down interest rates and finally the governement cut down the top-income tax rate from 65% to 22%. All that in 1921, at the very start of the roaring ’20s. If that is not Keynesian, I do not know what that is… Maybe it all ended up in complete catastrophe and I am ready to admit that (same thing happened post-2000). But the fact is that mini-depression is showing nothing specific. The Fed triggered it. And the fed finished it.
Pingback by UCLA: FDR Prolonged the Depression - Page 2 - US Message Board - Political Discussion Forum on 12 July 2010:
[...] [...]
Pingback by A Qualified Defense of Nostalgia « In Between Names on 22 July 2010:
[...] Murphy may feel nostalgic for the Federal Reserve in 1920 (without wanting bring back prohibition and flappers) because he [...]
Pingback by Does anyone still deny the causes of the Great Depression... on 12 August 2010:
[...] [...]
Pingback by Watch the jobs fade to black - Page 2 - My Les Paul Forums on 13 August 2010:
[...] the jobs fade to black The Forgotten Depression of 1920 – Thomas E. Woods, Jr. – Mises Daily The Depression You’ve Never Heard Of: 1920-1921 | The Freeman | Ideas On Liberty Not-So-Great Depression | Jim Powell | Cato Institute: Commentary You can, in fact stimulate the [...]
Pingback by Stimulus Spenders and Their Silly Excuses « The View from Abroad on 28 August 2010:
[...] or whatever the political establishment wants to call it simply doesn’t work. As economist Robert P. Murphy has written we have a great comparison between the depression of 1920-1921 and the Great Depression [...]
Pingback by The View from Abroad « Next Free Voice on 28 August 2010:
[...] or whatever the political establishment wants to call it simply doesn’t work. As economist Robert P. Murphy has written we have a great comparison between the depression of 1920-1921 and the Great Depression [...]
Comment by Richard Popovich on 8 September 2010:
I had never heard of the depression of 1920 until I learned about it from a program on the Glenn Beck program. The rhing that is surprising about that fact is that I have a degree in history. I in the went through four years of college and not one professor ever talked about this important event.
The other important fact about this is that I received my degree(s) from two universities that are considered as conservative. They are located the progressivein one of the most conservative state of the country, Utah. The two schools; Brigham Young University and Weber State University.
Our history is being controlled by our educational system just as much as our money supply is being controlled by the Federal Reserve. The government’s Department of Education and the progressives do not want students to learn about certain events, because if they do, the progressive agenda couldn’t be carried forth.
The learning of real American History is more important to the future of our civilization than any of the sciences. In fact I believe that it is only second to the teaching of reading and writing the English language.
America is repeating the mistakes of history because our society is being robbed of it. This is something that either needs to changed, or America will be thorwn on the trashheap, along with all of the other civilizations that rose and fell because they failed to learn from their mistakes.
Comment by Charlie on 17 September 2010:
Jerome- It seems you are basing the economy’s health on one single factor. If you read the last part of the article you will see that he references the 25% unemployment experienced in 1933, in addition to the outrageous tax hike. While I may not agree with his statement that 1933 was economically the worst year ever, it isn’t difficult to find valid reasons why someone else would think so.
Pingback by Fool’s Paradise – heading for a fall | Yolanda's Palace on 21 November 2010:
[...] The Depression you’ve never heard of – on Freeman Online [...]
Pingback by Los presidentes de entreguerras y las fantasías de los historiadores - Mises Daily en español on 3 January 2011:
[...] de dos dígitos durante una década. Y en muchas cifras, el primer año de la depresión de 1920-21 fue peor que la Gran Depresión; aún así la economía rebotó [...]
Comment by Kevin Beck on 13 January 2011:
A message to the politicos that inhabit Washington, DC: Get out of the way! A government which governs best, governs least. And I don’t see anything promising that these “experts” have that should empower them to solve this mess, except for the fact that we as a nation made the mistake of allowing the Federal government to have as much influence in our lives as they now have. And when the nation’s education system is dumbed down, how can we expect these so-called experts to make the right decision? The best thing they can do is de-institutionalize the problems their predecessors helped create, and stay out of the nation’s economic business!
Comment by Charlie (not the previous poster) on 13 January 2011:
How dearly would I love to see the government act with the stones of 1920. It may be a little too late now, but perhaps we can still do something drastic to fix these problems.
I still think the best way would be to start going back to the gold standard as perscribed in the Constitution and cut our addiction to deficit spending.
I thought Ilinois took a very bold step in limiting its budget growth by making a provision that would cut the tax increases they passed if the year-over-year budget growth exceeds 2% in the next three years.
While I’m not necessarily in favor of tax increases, I think Congress could borrow something from that and get a useful pointer from that.
Comment by Davi Orel on 15 January 2011:
The liquidity trap comes naturally at the end of “irrational exuberance” stage of boom years. Booms usually result from some signicant gains in productivity with which wealth is created. Sometimes they are created by governments, usually wars. At this “irrational exuberance” period a significant portion of investing goes into speculative investments which do not generate true wealth as do normal win-win economic transactions. This being a speculative game, the playes know that there will be losers when the bubble bursts, they just hope that it will not be them. The characteristic of this period is the excitement, nervousness and edginess of the participants, like in daily trading, for example. They are ready to jump the ship at the slightest signal of the expected downturn.
So, when the music finally stops, the funds are quickly withdrawn from these marginal investments, leaving many projects unfinished and marginal producers unemployed. For this period of time – when the financial scene is being re-evaluated – even the deserving projects are slowed down. How much? It depends on the magnitude of their contribution to creation of wealth. This is a natural process that has been respected by most governments up until the 1920-21 recession because it was recognized for what it was – a natural process of clearing and healing of the system and a time for preparation of the ground for next expansion.
It seems that the 1920-21 recession was the first time when the “scientific management” people had enough political clout to introduce government’s interference with the natural economic process. As we now know, this interference was on the right side, aimed to make the down-slope shorter at the price of making it steeper. This would probably remain a standard government procedure for the rest of the 20th century, if it were not for one critical new element that appeared on the map between 1920-21 and 1929, the communism and Soviet Union.
Communists morphed “scientific management” into a philosophy of planned economy and came up with the utopian notion that government can totally eliminate the cyclical nature of economy throught either monetarist or Keynesian approach, or both. The usual suspects (academia, media, etc.) had a proof in Stalin’s Soviet Union, which had no depression. They failed to recognize that Soviet Union was in economic cycle that had 180 degree phase shift from that of the western world. They believed that cyclicality is only in capitalism and that the communist planned economy is immune to it. These people made up about a half of Roosevelt’s government, and they did their best to destroy America’s capitalist economy that’s based on private ownership. The other half was made of Keynisians who did not want to destroy capitalism as such. They were convinced that applying Keynesisn model to it would be the cure for the cyclical nature of capitalist economy.
We all know the consequences. Let’s hope that Obama’s replaying of this tired, 80 years old scenario will lead to its abandonment and to it getting locked back in Pandora’s box, where it will wait for another 30 years until it is dusted off and resurected by a new generation of predators and parasites.
Pingback by Rand Paul unveils plan for $500B in budget cuts - Page 12 - Political Forum on 8 February 2011:
[...] [...]
Pingback by The Forgotten Economics | Krugman is Wrong on 18 March 2011:
[...] The Depression You’ve Never Heard Of: 1920-1921 – http://www.thefreemanonline.org/featured/the-depression-youve-never-heard-of-1920-1921/ [...]
Pingback by Anonymous on 25 March 2011:
[...] [...]
Pingback by Robert Reich says we're headed for a double-dip - CycloneFanatic on 31 March 2011:
[...] permalink Maybe you should look at history a little bit The Forgotten Depression of 1920 – Thomas E. Woods, Jr. – Mises Daily The Depression You’ve Never Heard Of: 1920-1921 | The Freeman | Ideas On Liberty [...]
Pingback by Readings for the Vanderbilt Debate on Gold vs Fiat Money on 22 April 2011:
[...] I don’t think deflation is a good explanation for the severity of the Great Depression, read this article comparing it to the 1920-1921 Depression. (However here is a Keynesian [...]
Pingback by Ideology vs. Reality - Civitas Review Online on 12 May 2011:
[...] readjustments needed for recovery.Perhaps they would benefit from a quick history lesson about the recession of 1920-21. This recession featured a larger initial downturn in the economy. But rather than respond with [...]
Pingback by When Times Are Tough, the Proper Move Is to Cut Spending | Scott Bratcher on 19 May 2011:
[...] fact, as Tom Woods and I have pointed out repeatedly, the Depression of 1920–21 provides a textbook example of the Fed engaging in [...]
Pingback by The Rollback of QE2, and The Depression You’ve Never Heard Of « The Solution is the Problem on 20 May 2011:
[...] Consider the economic depression of 1920-21. What’s that? You’ve never heard of it? That must be why it is called “The Depression You’ve Never Heard Of.” This article by economist Robert Murphy is well worth your [...]
Pingback by Obama Says Recovery, “Takes Time” — Historically Not True With Conservative Tactics « SD Rostra on 11 June 2011:
[...] of references: http://www.firstprinciplesjournal.com/articles.aspx?article=1322&loc=r or here: http://www.thefreemanonline.org/featured/the-depression-youve-never-heard-of-1920-1921/ Tags: 2012, Depression, obama, taxes, Unemployment This entry was posted on Saturday, June [...]
Pingback by My Comments to the President’s Speech « I Dispute This on 26 July 2011:
[...] And, based on analysis of both our history in the New Deal era and Japan in the 1990s, that formula doesn’t work (link, link). In fact, the only formula I know of that has been proven to work in our history is cutting both taxes and spending (link). [...]
Pingback by Balance the budget | Project: Opinion on 29 July 2011:
[...] explodes and standards of living skyrocket. In fact, this is precisely what happened in the recession of 1920-1921 and the subsequent era of the “Roaring [...]
Pingback by How to balance the budget | Project: Opinion on 30 July 2011:
[...] amounts of money are spent to soften or prevent a crisis, yet the end results are, at best, poor. History has shown us that when one allows the market place to freely self-correct itself, it will do so in [...]
Comment by greg on 4 August 2011:
you guys can talk all the economic jargen you wan’t . discuss it to the end of time . what i want to know is why . why the the hands of approach of harding led to economic boom . why the hoover and fdr administrations led to eight years of depression didn’t work . how the entitlement programs they introduced , social security welfare . every govement program there is .is broke . explain to me this . if i take one dollar out of my pocket . i send it to the federal goverment . most of that dollar goes to creating a job . pays and hire goverment employees to create that job ( pays for their retirement and benifits ) , they don’t supply me a product i was gonna spend my dollar on . how much of that dollar i sent goes to goverment or if i had that dollar , going to peaple who produce jobs ?
i’d really like to know .
Comment by Charles Landesman on 8 August 2011:
Your discussion of the two depressions and the lessons you draw from it is excellent, but the assurance with which you assert your claims is not justified. The reason is that depressions, recessions, and large scale economic phenomena for which we have invented simple names are not natural kinds; that is they do not behave like, say, lumps of iron, that exemplify identical physical properties and thus behave alike under similar circumstances. Depressions are what Hayek calls essentially complex phenomena (see his Nobel prize lecture “The Pretence of Knowledge”); this means that two or more instances of the ‘same’ phenomena may differ in important properties that produce totally different outcomes. They are like diseases identified only via their symptoms but that may have quite different underlying causes and conditions. For that reason, treating a depression as if it was a natural kind, which you do in this essay, is invalid. Confirmation of your hypothesis depends upon showing that the deep underlying properties of the two depressions do not differ in their causal powers.
Pingback by Austerity and tax cuts create jobs???? - Page 7 - US Message Board - Political Discussion Forum on 9 August 2011:
[...] Quote: Originally Posted by Truthmatters Please go get your example in history where this has born out as true? Here ya go, turd: The Depression You’ve Never Heard Of: 1920-1921 | The Freeman | Ideas On Liberty [...]
Pingback by A Depressão Esquecida de 1920-1921 « O Insurgente on 14 August 2011:
[...] The Depression You’ve Never Heard Of: 1920-1921, pro Rober P. Murphy para The Freeman [...]
Pingback by A Depressão Esquecida de 1920-1921 « Ricardo Campelo de Magalhães on 15 August 2011:
[...] 2 - The Depression You’ve Never Heard Of: 1920-1921, pro Rober P. Murphy para The Freeman [...]
Pingback by Det dummaste på länge « Ludwig von Mises Institutet i Sverige on 16 August 2011:
[...] av verklig ekonomisk kunskap. Det räcker med att förstå två exempel av rejäl ekonomisk kris: depressionen 1920-21 och depressionen 1929-1939. Den förra är ”problemet” Lindvall skriver om, medan den [...]
Comment by John Williams on 4 September 2011:
The cause is always the same. It is caused by aggregate inflation and deflation which affects the average price of all goods/services over time and is more fundamental than supply/demand inflation/deflation of goods and services which exists within the system and is due to personal preference. The prior is due to the money supply relative to goods and services and is therefore systemic while the latter is due to consumer demands, producer supplies and resources. Systemic problems have systemic causes. All historic economic problems essentially boil down to the fact that the money supply, which is an abstraction of goods and services, does not mirror goods and services in amount and that it is not dispersed in the most efficient manner. If every dollar created produced a good or service which was then traded to another party who had done the same, without any coercion or fraud, there would never be a problem but because trades have many middlemen it is easy for them to essentially “skim” off some of the productivity of others and get money without producing anything of direct use to anyone. This will only cause problems when their “skimming” actually increases the money supply causing it to grow faster than goods and services grow, causing systemic inflation. This only applies to the current monetary system, gold reverses inflation and causes deflation, historically anyway, as the gold money supply does not increase as fast as the productivity of goods/services increase.
Comment by John Hutchinson on 8 September 2011:
And of course, after the “great contraction” the U.S. proceeded to stagnate in the Great Depression of the 1930s
Comment by John Hutchinson on 8 September 2011:
Preceding ‘factual’ comment is a bit rich. I believe in neither Keynesian or Monetarist ideological frameworks. But I do believe in truth telling.
Pingback by New poll: its Newt's turn .... - Page 10 - VolNation on 7 December 2011:
[...] They just dismiss him because of a scandal that did very little harm to the American people. The Depression You’ve Never Heard Of: 1920-1921 | The Freeman | Ideas On Liberty [...]
Comment by My Homepage on 8 December 2011:
Aw, it was a very good post. In idea I would like to devote writing such as this furthermore,?
Pingback by Learning to Think Like an Austrian, Part 2 | Not Another Average Joe on 13 December 2011:
[...] By picking January 1920 as his start date, Sumner was in the midst of the huge inflationary boom during World War I (when the Fed was partially monetizing the massive debt issued by the federal government). To curb the rampant consumer price inflation (exceeding 20 percent on a year-over-year basis), the Fed jacked up rates and crashed the monetary base, ushering in the depression of 1920–1921. [...]
Pingback by Mutual Aid: Stateless/Libertarian Safety Net - Grasscity.com Forums on 8 January 2012:
[...] worse than 1929, but a hands-off approch was taken to the economy and the economy quickly recovered The Depression You. Can you stick to the topic [...]
Comment by iqmppameuk on 4 February 2012:
JuMCCg tpuvbjzhwrkk, [url=http://tjzwpkvubtzh.com/]tjzwpkvubtzh[/url], [link=http://svoghcfwodms.com/]svoghcfwodms[/link], http://nflgzjmippkg.com/
Comment by Zithromax on 4 February 2012:
http://www.zithromaxusfast.com/ drug zithromax pill identification zithromax z-pak dosage cheap zithromax
generic zithromax azithromycin mycobacterium avium
Comment by doxycycline on 4 February 2012:
http://buydoxyciclineus.com/ buy doxycycline 100mg lyme disease cheap doxycycline doxycycline and alcohol interaction
bird doxycycline
Comment by Buy Propecia on 4 February 2012:
http://buypropeciapillsus.com/ finasteride use women cheap propecia generic propecia accutane
discount generic propecia
Comment by Clomid on 4 February 2012:
http://buyclomidus.com/ clomid no prescription cheap clomid 50mg clomid online
buy clomid in china
Comment by Azithromycin on 4 February 2012:
http://www.zithromaxusfast.com/ pfizer azithromycin drug zithromax price no rx zithromax online drugstore
no prescription buy zithromax
Comment by doxycycline on 5 February 2012:
http://buydoxyciclineus.com/ doxycycline dosage for chlamydia doxycycline online doxycycline dosage sinus infection
uses of doxycycline
Comment by doxycycline on 5 February 2012:
http://buydoxyciclineus.com/ generic doxycycline hyclate order doxycycline buy doxycycline hyclate
doxycycline dental
Comment by doxycycline on 5 February 2012:
http://buydoxyciclineus.com/ prices buy doxycycline cheap doxycycline doxycycline dosage prostatitis
order doxycycline no prescription
Comment by Propecia Online on 5 February 2012:
generic propecia pakistan order propecia cause shedding finasteride propecia
generic finasteride reviews cheap http://buypropeciapillsus.com/
Comment by Zithromax on 6 February 2012:
http://zithromaxexpress.com buy zithromax azithromycin zithromax price azithromycin buy generic zithromax
purchase online generic azithromycin
Comment by Propecia on 6 February 2012:
finasteride no prescription propecia price price generic propecia lowest prices http://propeciaovernightshipping.com
china generic propecia
Comment by Generic Propecia on 6 February 2012:
dr reddys finasteride cheap propecia buy finasteride 1mg http://propeciaovernightshipping.com
generic propecia effective leading
Comment by generic valium on 7 February 2012:
http://valiumusafastdelivery.com uk online buy diazepamvalium online diazepam online india
buy diazepam 2005
Trackback by stop spam plugin on 7 February 2012:
Usefull website…
[...]always a big fan of linking to bloggers that I love but don’t like spam links? Check this wordpress plugin.[...]……
Pingback by Surplus Surprises Michigan, but Is It Safe to Spend Again? | The Freeman | Ideas On Liberty on 9 February 2012:
[...] “The Depression You’ve Never Heard of: 1920-1921” by Robert P. Murphy [...]
Comment by John Zube on 9 February 2012:
Neither of these depressions or any inflation would have occurred under full monetary freedom, i.e., without a money issue monopoly and legal tender power for an exclusive and forced value standard. John DeWitt Warner’s “The Currency Famine of 1893″, in “SOUND CURRENCY”, 1895, repeated 1896 and later microfiched and digitized (without the illustrations) in my PEACE PLANS series, is much more instructive on the self-help options, essentially based upon free clearing. On http://www.reinventingmoney.com three classical monetary freedom books by Ulrich von Beckerath on the self-help options are reproduced, together with many more such writings. On http://www.panarchy.org you can find my long but still incomplete free banking bibliography and free banking A to Z. Already Marx observed that whoever studies money only on the examples set by monetary despotism will never understand the natural laws of monies and currencies. Deflations, depressions, recessions, currency famines and all inflations and economic crises are not natural but produced by governments and their wrongful legislation and institutions.