James Grant’s The Forgotten Depression (2014) is a splendid account of an important period in U.S. economic history — the sharp but brief “depression” of 1921 — that is easily overshadowed by the Great Depression a few years later. It seemed to be, as Grant’s subtitle says: “The crash that cured itself.” This stands in contrast with the Great Depression, which remained uncured throughout the 1930’s even after enormous government intervention; or our own experience, milder but equally prolonged, since 2008.
I group it with Lawrence Kudlow and Brian Domitrovic’s JFK and the Reagan Revolution (2016) as an example of a new sort of hybrid – a readable history book by economic sophisticates. As the publisher of Grant’s Interest Rate Observer, Grant has spent the last few decades immersed in a discussion of markets and economies with some of the most sophisticated investors on Earth. Larry Kudlow brought similar expertise to JFK, with similarly superb results. Books by historians tend to become compilations of newspaper headlines, spiced with individual anecdotes; books by academics tend to be unreadable, and for those that persist nevertheless, compromised by fallacy and dogma born of academic isolation. Although Grant’s book is brief, enjoyable, and beautifully written, he cites the help of four research assistants, plus three other research contributors.
World War I caused a U.S. economic boom powered by European wartime demand and U.S. government military spending. In addition, the newly-created Federal Reserve was engaging in aggressive money-creation to allow huge U.S. deficits to be financed at attractive rates. A gold embargo in 1917 effectively suspended the gold standard and allowed inflation. When the gold embargo was lifted in 1919, the Federal Reserve had to reverse some of its The Forgotten Depressi... Best Price: $2.00 Buy New $3.14 (as of 08:45 EDT - Details) wartime money-creation to raise the value of the dollar back to its prewar parity and halt gold conversion outflows. At the same time, the federal government’s spending collapsed back to peacetime levels. Spending of $18.493 billion in the fiscal year ended June 1919 tumbled to $6.358 billion in 1920, $3.289 billion in 1922, and $2.908 billion in 1924. In 1921, the heart of the downturn, the Federal government ran a surplus of $509 million.
Commodity prices and wages had soared due both to wartime demand and Federal Reserve money-printing. With the war over, shrinking government spending, military demobilization and a return to gold standard discipline, these high prices and wages were unsustainable. In the ensuing adjustment, 1920-1921, prices and wages fell dramatically. And then, it was over: in mid-1921, the wonderful economic boom of the “Roaring ’20s” began.
The government’s response was the opposite of the interventionist nostrums that the economic manipulators have pushed for most of the last century. There was no government deficit spending and “easy money.” Exactly the opposite. And the result, after the intense but short-lived discomfort, was one of the best expansions of the twentieth century.
JFK and the Reagan Rev... Best Price: $1.99 Buy New $2.99 (as of 10:15 EDT - Details) While Grant’s subtitle suggests a passive approach, the evidence that Grant expertly unfolds in the body of the book illustrates a little different narrative.
The government was not “doing nothing.” Certainly, some of the cause of the recession was monetary: both the inflationary expansion by the Federal Reserve during the war, and the deflationary return to the gold standard, at the pre-war parity, in 1919. On fiscal policy, some very important changes were happening. President Woodrow Wilson suffered a stroke in September 1919 that effectively incapacitated his administration. The demands of wartime had led to all manner of economic intervention, including price controls and the nationalization or centralized control of industry. Many in his administration were committed socialists, even borderline communists, who wanted to retain both the wartime industrial controls and also the high-income tax rates, with a top rate that had soared to 77%. Government control of coal mining, railroads, and telephone and telegraphs, even after the war’s end, led to endless problems. The Wilsonians argued that these difficulties required that the controls remain, and still further controls imposed.
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