Why? Because it was mostly a supply-side story. This is a point in retrospect I should have fleshed out more in the article, and perhaps I will if I write anything else in the future. I relied on citing a handful of economists (you know, those Keynesian and mainstream ones that Tom Woods says ignore the 1920-1921 depression?) for the point because the argument I wanted to flesh out had more to do with policy and claims about Keynesianism.
At Cafe Hayek, George Selgin writes: "Just looked at that Wikipedia article on the 20-21 episode. The statistic reported there clear show that demand shrank substantially; as must be the case whenever both output and prices are falling. I do not know how our friend Daniel Kuehn, who is quoted in the article, arrived at his conclusion that K “that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920-21 recession was not characterized by any aggregate demand deficiency, fiscal stimulus was unwarranted.” The statement is if anything backwards: monetary stimulus is itself only capable of promoting recovery by enhancing aggregate demand; indeed, were there no deficiency of aggregate demand, monetary expansion could only serve to cause inflation, while fiscal stimulus, e.g., Mellon’s reduced tax rates, might in principle “stimulate” the economy’s supply-side.
Perhaps Mr. Kuehn will explain."
And I did, quoting extensively from Christina Romer: "I provided something of a chronology and interpretation to the real work that minds far more brilliant than mine already produced. I’ll quote one of them (Romer, 1988):
“The downturn of 1921 is conventionally attributed to a decline in aggregate demand. Lewis (1949, pp. 18-20) argues that private consumers and producers contributed to the decline in 1921 by overspending on all types of goods after the war. As a result, by 1921 their demand was satiated and the stock of durables was very young, so they greatly curtailed their spending. Friedman and Schwartz (1963, pp. 231-242) argue that the Federal Reserve Board caused a further fall in aggregate demand by allowing the money supply to contract sharply between 1920 and 1921. Available evidence appears to confirm the view that aggregate demand declined substantially between 1920 and 1921. For example, estimates of the money supply show that M1 fell 10 percent between 1920 and 1921. 23 In the conventional story this fall in aggregate demand is supposed to have caused a large fall in both output and prices because prices were not fully flexible.
The behavior of the superior Kendrick GNP estimates suggests that this conventional explanation must be altered. Despite the substantial fail in aggregate demand, the Kendrick series indicates that total GNP fell very little between 1919 and 1921. As a result, it is impossible to argue that the decline in demand moved the economy down an upward sloping aggregate supply curve and thus drove down both output and prices substantially. This is especially true considering the magnitude of the actual fall in prices between 1920 and 1921. In this period the implicit price deflator for GNP given in table 5. falls 16 percent and the BLS wholesale price index falls 46 percent.
An obvious alternative explanation for the behavior of the economy in 1921 is that prices were very flexible. If the aggregate supply curve for the economy were very steep in the period around 1921, then one would expect movements in aggregate demand to fall almost entirely on prices and to have very little effect on output. The possibility that prices were very flexible in this period is made stronger by the fact that as discussed previously, the government spending associated with World War I also led to relatively little movement in real output and substantial movement in prices.
General price flexibility, however, probably cannot explain the entire behavior of the economy in 1921. In particular, the decline in prices is larger than one would have expected judging from the behavior of the economy during the war. Using the data in table 5 one can see that real GNP rose 5 percent between 1917 and 1918 and the GNP deflator rose 15 percent. In contrast, between 1920 and 1921 a fall in real GNP of only 2 percent was associated with a price decline of 16 percent. This seems to indicate that there may have been some type of aggregate supply shock either during the war or in 1921.
The most obvious candidate for such a supply shock are the price controls implemented during World War I. However, while price controls were in effect in some indastries in 1918, most researchers estimate that they had only a limited effect in restricting price increases. This is because many of the controls took the form of guaranteed minimum prices designed to encourage production rather than maximum prices. A more plausible explanation for the
differential behavior of prices in World War I and 1921 is the occurrence of beneficial shocks to prices in 1921.
According to a classic study of the 1920s by George Soule (1947, pp.
99-100), a surge in agricultural production drove down prices in 1921. This surge in production is due to the fact that American farmers continued to produce at wartime levels despite the recovery of European production. Soule argues that the price of primary commodities produced outside the United States such as wool also plummeted in 1921 because of a surge in supply. Soule attributes this surge to the fact that a variety of agricultural goods and raw materials had been accumulating in the producing countries for several years because the foreign shipping network customarily used to transport the goods was disrupted by the war. By 1920, the European and American shipping industries had been restored and these goods began to enter the market.
Several pieces of evidence suggest that these shocks occurred and that they were significant.”
She goes on from there, but I think you get the point of the argument. Broadberry had similar conclusions for the UK about this time, and Temin and Smith both come to these conclusions too (maybe not Temin… maybe just Smith and Temin was commenting on something else – I’d have to go back and look).
As someone who both respects Romer’s careful work in attending to pre-WWII data series and as someone who understands that there are beneficial deflations, I think you should be able to appreciate this argument."
For the Weekend...
58 minutes ago