C.J. Maloney on the 1920 Depression

At RealClearMarkets, C.J. Maloney has a new post up on the 1920 depression. It's pretty close to the Powell/Murphy/Woods narrative that I've taken issue with before. I'm happy for the exposure that the "forgotten depression" is getting, but it just makes me hope my R&Red article gets through soon.

To briefly recap my position, I think it's misleading to use the 1920-21 downturn as a test case for fiscal stimulus. The relevant facts are that nominal interest rates increase dramatically during the episode, we had just come out of a period of sharp inflation, and there was no clear deficiency in aggregate demand. There was also broad expectation that this was a bubble popping, and that there was not any reason to think that a couple years down the line would be negatively affected. U.S. wage adjustment was more substantial than wage adjustments internationally as well. All of these factors put together, according to standard Keynesian theory, make for a self-adjusting market.

Nothing in standard Keynesian theory suggested that fiscal policy was necessary. None of the normal preconditions for fiscal policy that one would think of were apparent in 1920 and 1921.

Keynesian theory might have conceivably said that NY Fed Governor Strong's strong medicine could have been tapered back a little earlier than it was... maybe. But there's not a lot of agreement on this point (nor even very much discussion).

Enjoy the Maloney article, but of course (as with anything) read it critically. This also makes me think I should find an outlet for a shorter, easier to understand version of my argument. Not everybody reads the Review of Austrian Economics, after all!