Jonathan has another post up on the 1920-21 depression, siding with Steve Horwitz over Robert Murphy.
Steve's post on this is good, but I think he overlooks one important thing that comes out in my paper - which needless to say Murphy misses too. All the most recent research suggests that the 1920-21 depression was driven by an aggregate supply shock. Horwitz contrasts it on the dimensions of (1.) wage rigidity (he attributes to Hoover... I have my doubts on the Ohanian story), and (2.) monetary policy. But he just inexplicably assumes that the switch from rigid to flexible wages is the difference between a 1920-21 outcome and a 1929 outcome. And I suppose Jonathan assumes this too since he says he more or less agrees with Steve.
Wage flexibility and monetary policy have different impacts depending on the level of the interest rate, the behavior of wages internationally, expectations, and whether a downturn is demand or supply driven. Keynesian theory says that even if you made wages flexible in 1929 you would not have gotten a 1920-21 downturn - you still would have gotten a depression.
To test that even in the most basic way we'd need a supply driven downturn with wage rigidity, a supply driven downturn with wage flexibility, a demand driven downturn with wage rigidity, and a demand driven downturn with wage flexibility. We don't have that, which is why I say in my article that Murphy, Woods, and Powell can't hope to test Keynesian theory with the 1920-21 downturn.
As for whether free banking would have done the trick, this is tough. First, would free banking have lead to the bubble in the first place? Well, free banks aren't in thrall to the Wilson War Department so that would suggest "no". Then again, free banks are liable to bubble psychology in a way that the Fed isn't which would suggest "yes". Either way, if I recall it was the Fed that lead in popping the bubble, not private banks. I'm not a free banking theorist - those are just some thoughts.
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