Over the weekend I read a fascinating new book by financial journalist James Grant, The Forgotten Depression: 1921, The Crash That Cured Itself. During most economic crises, particularly in our most recent difficulties beginning at the end of 2007, there is often an overwhelming cry—from politicians, much of the public, and a variety of special interests—for the government to “do something.” So many Americans trust that the federal government has the intelligence to shape markets, proffer sound economic policies, and protect against downturns. Those believers could not be more wrong, according to Grant and other free-market economists, and the depression of 1921 is a great case study in the (relatively speedy) recalibration of the market when government shows restraint in intervening.
After WWI, rapid inflation turned into major deflation in 1920, damaging the value of the dollar and affecting employment, investment, and other components of the American economy. The administration of Woodrow Wilson devised a strategy to deal with the oncoming troubles back in 1918. It entailed “a federal minimum wage, a federally mandated eight-hour day affecting all business and industry, old-age pensions, federal health insurance, federal housing, control of fundamental raw materials, federally subsidized mortgages, the federal regulation of securities issues and a federal employment agency.” Sound familiar?
However, the change in the presidency, after Wilson became debilitated, prompted the federal government to react by boldly...not following Wilson’s plan. Warren Harding’s administration was “committed to a period of economy in government.” “There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures,” Harding said. “There has seemingly grown up an impression that the public treasuries are inexhaustible things, and with it a conviction that no efficiency and no economy are ever to be thought of in public expense. We want to reverse things.” Malinvestment was properly strangled and prices evened out as the budget was balanced, taxes were cut, interest rates were adjusted, and only 18 months later, the Roaring Twenties took off. Under the presidencies of Harding and Coolidge, the American economy was able to stabilize itself, and the country avoided the lengthy recovery periods that took place in the Great Depression of the 1930s and the Great Recession of this decade, which were guided by the well-intentioned but ultimately detrimental interventionist policies of Hoover, Roosevelt, Bush, and Obama.
Though the book is not too long (only 218 pages), it is rather dense, with loads of quotes, dates, and monetary data from the period described, so it can be a bit dry for those who aren’t used to such historical research. Because it is a difficult read, if you absolutely refuse to tackle the whole book, at least read from Chapter 10 to the end (the final 80 pages or so). After explaining the many factors that led to the collapse in 1921, many of which will seem eerily familiar, the back half of the book outlines the minimal solutions that buttressed the nation and helped ensure that “no one would wind up affixing the label great on the depression of 1920-21.”
If you have a history book you’d like to recommend, send it my way. I’d love to check it out!
After WWI, rapid inflation turned into major deflation in 1920, damaging the value of the dollar and affecting employment, investment, and other components of the American economy. The administration of Woodrow Wilson devised a strategy to deal with the oncoming troubles back in 1918. It entailed “a federal minimum wage, a federally mandated eight-hour day affecting all business and industry, old-age pensions, federal health insurance, federal housing, control of fundamental raw materials, federally subsidized mortgages, the federal regulation of securities issues and a federal employment agency.” Sound familiar?
However, the change in the presidency, after Wilson became debilitated, prompted the federal government to react by boldly...not following Wilson’s plan. Warren Harding’s administration was “committed to a period of economy in government.” “There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures,” Harding said. “There has seemingly grown up an impression that the public treasuries are inexhaustible things, and with it a conviction that no efficiency and no economy are ever to be thought of in public expense. We want to reverse things.” Malinvestment was properly strangled and prices evened out as the budget was balanced, taxes were cut, interest rates were adjusted, and only 18 months later, the Roaring Twenties took off. Under the presidencies of Harding and Coolidge, the American economy was able to stabilize itself, and the country avoided the lengthy recovery periods that took place in the Great Depression of the 1930s and the Great Recession of this decade, which were guided by the well-intentioned but ultimately detrimental interventionist policies of Hoover, Roosevelt, Bush, and Obama.
Though the book is not too long (only 218 pages), it is rather dense, with loads of quotes, dates, and monetary data from the period described, so it can be a bit dry for those who aren’t used to such historical research. Because it is a difficult read, if you absolutely refuse to tackle the whole book, at least read from Chapter 10 to the end (the final 80 pages or so). After explaining the many factors that led to the collapse in 1921, many of which will seem eerily familiar, the back half of the book outlines the minimal solutions that buttressed the nation and helped ensure that “no one would wind up affixing the label great on the depression of 1920-21.”
If you have a history book you’d like to recommend, send it my way. I’d love to check it out!