Glasner on 1920-21

David Glasner cites both of my articles on the 1920-21 depression in this post. He also adds some thoughts of his own, which is one of the things I've really appreciated about the blogosphere.

After my RAE article, I got a lot of additional insights into the period. Don Boudreaux highlighted what was going on with international trade, and Paul Krugman and Brad DeLong both talked about what was going on with private debt levels (which has implications for the impact of a deflation). Here, David points to the operation of the gold standard. Because the U.S. held so much gold, we effectively had control of the value of the dollar.

I know in a draft I had some discussion of Keynes and Hayek's views on the U.S. policy of gold sterilization and our large gold reserves but I know I cut a lot of that discussion out because the article was initially too long. Anyway - whatever I had in a draft or in the final certainly wouldn't have explained the relevance as clearly as Glasner does here. He also has an interesting story about Rothbard:

"On at least one occasion, no less an authority on Austrian Business Cycle theory than Murray Rothbard, himself, actually admitted that the 1920-21 Depression was indeed a purely monetary episode, in contrast to the Great Depression in which real factors played a major role. In the late 1960s, when I was an undergrad in economics at UCLA, Rothbard gave a talk at UCLA about the Great Depression. All I really remember is that he spent most of the talk berating Herbert Hoover for being just as bad as FDR. Most people were surprised to find out that Hoover was such an interventionist, though anyone who had read Ronald Coase’s classic article on the FCC would have already known that Hoover was very far from being a free market ideologue. I had just started getting interested in Austrian economics – while my contemporaries were experimenting with drugs, I was experimenting with Austrian economics; go figure! I sure hope no permanent damage was done – and was curious to hear what Rothbard had to say. But it was all about Herbert Hoover. Later, I asked Axel Leijonhufvud, who had also attended the talk, what he thought. Axel said that Rothbard was a scholar, but didn’t elaborate except to say that he had chatted with Rothbard after the talk asking Rothbard if there had ever been a purely monetary depression and that Rothbard had said that the 1920-21 Depression had been purely monetary. So there you have it, Rothbard, on at least one occasion, admitted that the 1920-21 Depression was a purely monetary phenomenon."

Warren Harding is A-OK with me

Another thing on the 1920-1921 stuff.

A lot of this inevitably turns into "Warren Harding was great" or "they don't like Harding". As a non-Harding scholar but as someone who is modestly conversant in the economic events of 1920-1921, I want to make clear that I think Harding was a fine president, for the brief time that he served. Labor unrest played a major role in the downturn, and he could have cracked down on that, but I know of no particularly draconian action from the Harding administration. Harding released Debs from the jail that Wilson threw him in on inexcusable, trumped up charges. Harding wisely cut taxes which, while not some depression-curing elixir, was the right move. Harding was a "return to normalcy" and a long-term growth president. He was a good president.

The one stain (which I don't know much about) is the Teapot Dome Scandal. I'm told he didn't have direct involvement in that. That's good, but not great. Presidents ought to know what goes on in their administration. So that's not ideal, but overall I don't judge Harding to be a "bad president" or anything like that. The caveat - as I said above - is that I'm certainly no Harding scholar.

UPDATE: Oh! And I almost forgot! Harding established the OMB which was an extremely wise move that was probably long overdue.

Krugman on 1920-21

Yesterday, Paul Krugman had another quick post on Harding and the 1920-1921 depression. It's been odd how the timing on his posts has worked - last time he commented on it, my RAE article just came out, so I sent it to him and he linked to it. This time, too, he posted shortly after my CJE article came out, so I sent that to him as well, and then I got another link!

I suggested if he was short on time he scroll down to the figure - I thought he'd like that.

I do want to clarify something on the passage he cites. It makes it sound like I may even think that post-war austerity caused the 1920-21 depression. That was certainly something you heard at the time (and a big part of the reason why a few people thought there might be a depression after WWII). I don't actually think it's quite that simple, myself - and I don't want people to be thrown by the passage Krugman cited. In my opinion Christina Romer (1988) has amply demonstrated that demand shocks had little to do with the 1920-21 depression. I agree. What I think is reasonable to say is that the sort of demand shock implicit in the rapid demobilization might have made things a little worse than they would have been to boot. That was really the intention of that passage.

Certainly if fiscal austerity was an important determinant of recovery, as some claim, the deep cuts of the Wilson administration should have prevented us from ever falling into the 1920-21 depression in the first place!

My CJE article has been published

Here - it's free access too! I wrote this up quite quickly. I like it because I was able to make a couple points I did not make in the RAE article. I do wish I took more time to discuss the details of Romer's analysis - something I realized would have been valuable after the RAE article. But there was a deadline for the special issue so I really had to get down a brief note rather than a full article. I ain't done with 1920-1921 yet, so hopefully I'll discuss it in more detail in the future.

This is the issue - it's a special issue on austerity. I haven't read any of the articles yet, but they're all free too. Some names you might recognize among the authors are James Galbraith, Robert Pollin (of Political Economy Research Institute), and Stephen Kinsella (a guy Krugman cites a lot when discussing Ireland).

Who was an early builder of a national highway network? Who started federal funding of maternal and children's health?

Eisenhower Interstate Highway System on highways? Nope.
Clinton's CHIP program on maternal and children's health? Nope.

Warren Harding on both counts (and it wasn't even an election year - it wasn't even a mid-term year!).

Eisenhower was involved in the first decision to some extent. Following in the proud footsteps of Lewis and Clark, he took a presidentially sanctioned road-trip in 1919 to test out the quality of the roads. Eisenhower gave them a thumbs down. Wilson had provided some road funding in 1916, but it wasn't much and the war disrupted its progress. Harding put a lot more money into it in November, 1921, and tens of millions of dollars of construction went on until 1923.

The second decision is a reference to another law passed in November, 1921, to give money to the states to set up maternal and infant health clinics. It established over 3,000 clinics until it was finally shut down in 1929 over accusations that it was socialist.

Casey Mulligan would have loved the 1920-1921 Depression

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."

My Review of Austrian Economics article is out!

Volume 24, Number 3 is here.

I have another short article submitted to the Cambridge Journal of Economics on the 1920-1921 depression. When I know how that has fared, you'll know.

1920-21 request

I'm trying to churn out a quicker piece on 1920-21 for a call for papers using some of the research material I didn't use for the RAE article, and taking a somewhat different angle on it, and I have a request: does anyone know of any politicians (not economists/pundits) calling for fiscal austerity who use 1920-21 as an example? I know Ron Paul has specifically mentioned the episode in an interview, but I am unaware of any besides him. It would be ideal if they were British or American politicians but since the Brits didn't recover by the late 20s I doubt many of them would reference it.

A question to readers on 1920-21

Does anyone know of a good treatment of the 1920-21 depression in the United Kingdom?

I'm at it again.

Ryan Murphy on my 1920-21 Paper

Ryan Murphy writes:

"Daniel Kuehn, frequent commentator on the blog Coordination Problem, argues that the 1921 depression is not a counterexample to aggregate demand explanations of the Great Depression. I have sometimes used the 1921 argument since I came across it, but I’m not particularly invested in it. It wouldn’t surprise me, given the caliber of the historians Kuehn opposes, that the argument is wrong. However, I have many problems with his conclusions. Broadly speaking, there are two ways to interpret Keynes. One is the textbook version which we see in schools, known academically as the neoclassical synthesis. The other is the interpretation of the Post-Keynesians. From the purely historical standpoint, I think the Post-Keynesians have a better claim to be truly representative of what Keynes meant. Kuehn emphasizes the role of interest rates in Keynes’s thought, but I think that is both too far but not far enough. It is not far enough in the sense that, when you get down to it, Keynes of The General Theory had only secondary interest in using interest rate policy to get the economy to full employment. What he really wanted to do, since animal spirits would subvert interest rate manipulations, was to nationalize the level (thought not the allocation) of investment. Where Kuehn goes too far is that he misses the entire point of the neoclassical synthesis. The IS-LM model that we see today more or less shows that the effects Keynes was talking about are SPECIAL cases, not general ones, which require assumptions like sticky wages or the liquidity trap for the policies Keynes endorsed (i.e. deficit spending) to be meaningful. Kuehn does briefly address whether Keynes believed de-stickying wages could fix things, but it’s neither relevant for modern policy debates (MICROFOUNDATIONS!!) nor the Post-Keynesian interpretation of Keynes. As such, he flies past both the Keynesian analysis of both old Keynesians like Samuelson and the Lucas Critique which really gave teeth to those assumptions. I’m just repeating the mainstream interpretation of history of thought perspective here, and Kuehn doesn’t adequately address it, despite his assertions and citations of historians who agree with him. Perhaps Kuehn is completely correct in his historical analysis regarding the crash of 1921. That is not my area of expertise, although neither is history of thought. But his supposedly conciliatory efforts between Keynesians and Austrians (betrayed by his refusal to give any substantial criticism of Keynesians) hinge on his interpretation of modern Keynesianism, which I have reason to suspect. I saw this link from Robert Murphy (no relation), who was a referee on the paper. Why Robert, did you allow this to go through?"

A few thoughts: First, I reject his juxtaposition of two ways to interpret Keynes: textbook of Post-Keynesian. I see Keynes as a Hicksian where the interest rate clears the money market but not necessarily the loanable funds market. For that reason, I don't have much problem talking about Keynes with respect to "textbook Keynesianism". Of course it's different, but not in a way that really talking about them all as "Keynesianism". I also don't see how the fact that the Post-Keynesians have latched on to distribution and uncertainty questions gives them any primacy in interepreting Keynes. Uncertainty was indeed central - income distribution was not. But uncertainty was central in its role in liquidity preference, and that is something that "textbook Keynesianism" covers, so I see no real reason to privelege Post-Keynesians here. Anyway -the point being that I think all this waxing poetic about "Keynesian economics vs. the economics of Keynes", and whether Post-Keynesians carry the true mantle of Keynes is all pointless politicking with no real bearing for understanding the economics.

Murphy also thinks that interest rate policy was secondary to Keynes. If by this he means "monetary policy", I would say "not secondary, but not exclusive either". But even with fiscal policy and the socialization of investment - the whole point was to prevent investment from being hamstrung by artificially high interest rates. Interest rates are central whether we're talking about a monetary or a fiscal response. Murphy also gets the neoclassical synthesis and IS-LM exactly backwards. The special case is full employment. There's no reason to think that that particular point is hit on. Now, just because we're not at full employment doesn't mean we're in a depression, but there's a reason why people say "full employment by accident", not "underemployment by accident". The liquidity trap is a special case, it is true, but the neo-classical synthesis does not say that a Keynesian downturn is a special case. In the paper, I noted that monetary policy was sufficient and perfectly "Keynesian" as long as we're outside a liquidity trap. I still think this. But just because monetary policy is sufficient (and probably wise to stick with), that doesn't mean that fiscal policy is "meaningless" outside a liquidity trap, as Murphy suggests. Fiscal policy works as well inside as it does outside a liquidity trap. The thing is, in a liquidity trap monetary policy becomes less effective (not completely ineffective, but less effective), which is why we associate fiscal policy with liquidity traps.

He says I "fly past the Lucas Critique". It's true I don't mention it, but I can't think of how I'm being inconsistent with it. It seems to me I'm affirming the Lucas Critique in some ways by noting that Powell, Woods, and Murphy should not cut-and-paste lessons from historical cases where the policy regime and economic conditions were completely different. He says I don't adequately address the span of the history of thought. OK. What do you expect me to do? I had to cut stuff relevant to 1920-21 for length... I'm not going to wade into the squabbles of the 50s, 60s, 70s, 80s, etc.. I think I identified a perspective of Keynes that is fairly consistent throughout the Keynesian tradition, from Keynes himself to the present - perhaps excluding the Post-Keynesians (which doesn't particularly concern me). That doesn't cover all the details and theoretical innovations of intervening generations, but I think it's still a pretty useful exercise. One of my reviewers suggested that I may be describing Keynes accurately, but not modern Keynesians like Krugman. I responded to the reviewer that I think Krugman would approach 1920-21 precisely how I did and how Keynes did: it's not the same sort of recession, it doesn't require the same response, and it's more akin to 1981 than 1929 or 2008. I think recent posts on Krugman's blog indicate that I called that one right and my reviewer was simply wrong. My paper doesn't address every single variant of Keynesianism, it's true. But it holds up remarkably well in describing all Keynesians through the neo-classical synthesis, and all New Keynesians that aren't completely dismissive of "Old Keynesianism". This whole "Keynesian economics vs. the economics of Keynes" narrative is vastly overblown.

This I had to just laugh at: "But his supposedly conciliatory efforts between Keynesians and Austrians (betrayed by his refusal to give any substantial criticism of Keynesians) hinge on his interpretation of modern Keynesianism, which I have reason to suspect." I am conciliatory in two senses: (1.) I think elongation of the capital structure in response to interest rates makes sense and oughta be taken seriously as a macroeconomic process, and (2.) I don't blithely dismiss ABCT on the basis of evidence that doesn't actually dismiss it (and I expect Powell, Woods, and Murphy to extend the same courtesy for Keynesianism). Murphy will have to live with the fact that I am, in fact, a Keynesian. If that's not conciliatory, then I guess I'm not conciliatory after all.

I know I have a lot of criticisms of this review, but I do want to extend my appreciation to Ryan Murphy for taking the time to look over my paper, think about it, and write about it.

A Superlative in the Keynesian Blogosphere

I am guessing this is the first time that either Brad DeLong or Paul Krugman have cited an article from the Review of Austrian Economics.

Krugman on the 1921 Depression

My mind has been on title insurance and engineers lately - it's been a while since I've thought about the 1920-21 depression. Today, though, Krugman has a great post reminding us of the lessons of the episode.

My article on it is here. Not sure when it'll come out - maybe by the summer.

Everything I've ever written on 1920-21 on this blog is here. This was a truly fascinating episode in American history that I hope to revisit in the future. Krugman's argument is fundamentally sound as to what it has to tell us today. But I think it's more important than that for historical reasons. This marked a real turning point in macroeconomic policymaking in America. It was the first time (I know of) that fiscal authorities started talking seriously about tracking fiscal policy and using it as a tool to impact the economy. In the aftermath of the depression, discussions and arguments within the Fed lead to a fundamental change in how we do monetary policy (I had to cut this from the paper in the interest of length). It was an important period and it deserves more attention.

UPDATE: Brad DeLong adds a good thought too. I just emailed Paul Krugman and let him know about my article... I have no clue if he'll take interest or if he's too busy to pay attention. We shall see.

UPDATE 2: Krugman has more, basically elaborating on Brad DeLong's point. This is pure gold: "My bottom line is that the Harding recession and recovery is to the pain caucus what Chile’s retirement system was to Social Security privatizers: a tale of a faraway country of which we know nothing, which falls apart once you look even a bit at what actually happened." It's so exciting to see these guys taking note of this one. I should also add, this is why it's so important to have a good sense of economic history when you do economics, otherwise you're likely to misdiagnose things and draw false equivalences the way much of the commentary on 1920-21 has done. Whatever the merits of the programs that passed me over, I'm very glad to be going to a doctoral program that values and requires coursework in both economic history and history of thought.

UPDATE 3: One more update on a point that I think a lot of people ignore about 1920-21. A lot of people talk about this downturn as if it was quick. I think the reason for that is that because on some indices it was so deep, it looks like a fast in-and-out V recession, simply by virtue of the ratio of its amplitude. The thing is, it wasn't quick. It's clocked at 18 months by the NBER. If you look at all the recessions we've had that started since the creation of the Fed, 1920-21 was tied as the second longest, after the Great Depression. And what is it tied wtih? The current recession, of course! Now, we are struggling with a jobless recovery of the sort that they didn't have to deal with in the 1920s, but the point still remains - if you hear chatter in the blogosphere about how this was a short downturn, don't buy it. I have a longer post on this point here. It was not a pleasant one - and as Krugman, DeLong, and I have pointed out (for my part - NUMEROUS times), it was a qualitatively different downturn from the one we are experiencing now.

Another blog post on the 1920-21 article

It's here. Not a lot of discussion because he can't access the article, but still nice to see people taking notice. He calls it an "interventionist" response... I suppose that's fair enough.

I like the blogger's description of himself:

"I am a law student at Rutgers University in Camden. My main career goal is to use the law to force my Libertarian ideals on people I’ll never meet. If these people could subsidize me as well, that would be a bonus."

Sounds reminiscent of my post on libertarian social engineering :)

A Québécois blogger's review of the 1920-21 article

I came across a Québécois blog that discusses my 1920-21 article. It's in French - I read it fairly easily with the help of Google Translate. The guy is a libertarian with Austrian sympathies, but seems to have generally liked my article and is in agreement that previous statements by Woods, Powell, and Murphy are far too strong (and in some cases - as with Harding's role - simply wrong). I quibble with his reaction on two points:

1. He agrees with me that the contractionary monetary policy was consistent with Keynesianism, but he thinks Keynes would have recoiled immediately upon the appearance of deflation. In other words, he feels that Keynes would stop the inflationary run-up but would have no interest at all in restoring a more appropriate price level from the recent past. I would disagree.

2. He says that 1920-21 is consistent with ABCT. I don't disagree with this in my article, but I would be more nuanced. Nothing that I have seen demonstrates the incompatibility of 1920-21 with ABCT, but we have a very long way to go until we can say that it is a good example of ABCT. I know of no work that actually shows there was a distortion of the capital structure as a result of low interest rates at this time. I know of no work that actually shows that the readjustment of these distortions is the source of the depression. I know of no work that shows that recovery would have been possible without an easing of monetary policy by the Fed. ABCT is not out of the running, but a lot more work needs to be done to call 1920-21 an Austrian downturn.

Profitez de l'article de blog!

A Mises Community Review of my 1920-21 Paper

Jonathan directs me to this post about my paper. I have an extensive reply in the comment section. The criticisms are not new - they follow very closely along the lines of one of my reviewers. For the most part I don't think they are substantial, and I explain why in my comment. The author also reads my paper far, far, far to strongly. To clarify (I did not think this needed clarification), I do not think Harding or Strong were Keynesians. I do not think it is uniquely Keynesian to lower discount rates to avoid deflation. I do not think that it is "Keynesian" to raise discount rates in response to high inflation. There are a litany of other "I do not think that and I'm pretty sure I never said that"s in my response. The point is simply that Keynes would not have disagreed with the many non-Keynesians on most of these points, and there was nothing about 1920-21 that would have driven Keynes - at any point in his life - to do all that much different than what was already done. I'm not expert on the inter-war economy or on Keynes yet. If I've truly blundered I'd enjoy hearing it. But half these critiques aren't really valid, and the other half involve claims I never made.

Thanksgiving Proclamation, 1921

THANKSGIVING - 1921
BY THE PRESIDENT OF THE UNITED STATES OF AMERICA - A PROCLAMATION

That season has come when, alike in pursuance of a devout people’s time-honored custom and in grateful recognition of favoring national fortunes, it is proper that the President should summon the nation to a day of devotion, of thanksgiving for blessings bestowed, and of prayer for guidance in modes of life that may deserve continuance of Divine favor.

Foremost among our blessings is the return of peace, and the approach to normal ways again. The year has brought us again into relations of amity with all nations, after a long period of struggle and turbulence. In thankfulness therefore, we may well unite in the hope that Providence will vouchsafe approval to the things we have done, the aims which have guided us, the aspirations which have inspired us. We shall be prospered as we shall deserve prosperity, seeking not alone for the material things but for those of the spirit as well; earnestly trying to help others; asking, before all else, the privilege of service. As we render thanks anew for the exaltation which came to us, we may fittingly petition that moderation and wisdom shall be granted to rest upon all who are in authority, in the tasks they must discharge. Their hands will be steadied, their purposes strengthened, in answer to our prayers.

Ours has been a favored nation in the bounty which God has bestowed upon it. The great trial of humanity, though indeed we bore our part as well as we were able, left us comparatively little scarred. It is for us to recognize that we have been thus favored, and when we gather at our altars to offer up thanks, we will do well to pledge, in humility and all sincerity, our purpose to prove deserving. We have been raised up and preserved in national power and consequence, as part of a plan whose wisdom we can not question. Thus believing, we can do no less than hold our nation the willing instrument of the Providence which has so wonderfully favored us. Opportunity for very great service awaits us if we shall prove equal to it. Let our prayers be raised, for direction in the right paths. Under God, our responsibility is great; to our own first, to all men afterward; to all mankind in God’s own justice.

Now, therefore, I, Warren G. Harding, President of the United States of America, hereby designate Thursday, the twenty-fourth day of November, to be observed by the people as a day of Thanksgiving, devotion and prayer; urging that at their hearthsides and their altars they will give thanks for all that has been rendered unto them, and will pray for a continuance of the Divine fortune which has been showered so generously upon this nation.

In witness whereof, I have hereunto set my hand and caused the seal of the United States to be affixed.

Done at the City of Washington this thirty-first day of October in the year of our Lord, one thousand nine hundred and twenty-one, and of the independence of the United States OF America the one hundred and forty-sixth.

Warren G. Harding

The Forgotten Depression or the First Great Recession?

I now regularly Google various combinations of "1920-1921 depression" to keep my finger on the pulse of the discussion of the episode, paying particular attention to discussion of it on blogs.

One thing that pops up regularly is "the 1920-21 depression was very deep but we got out of it quickly!" I'm not sure where I'm pretty sure I know where this meme got started, but it's simply not true. The 1920-21 depression lasted 18 months, which of course pales in comparison to the Great Depression.

But if you compare that to the duration of recessions in the period after the Federal Reserve began operations (in 1914), it is tied as the second longest recession on record. And which episode is it tied with? You guessed it! The current "Great Recession" - which has also been dated as lasting 18 months.*

Now, how much do these durations really mean? That, of course, is up for debate. One of the biggest reasons why we even care about economic fluctuations is the impact they have on unemployment. Unemployment can persist long after the decline in economic activity has ended, and we've certainly had periods where growth has picked up but employment hasn't. It's legitimate that people aren't so sanguine about such occurrences. How you rank recessions based on what matters to you is your business. But the point is, under no reasonable definition was 1920-21 a quickie. Even if you redefine what matters to you so that 1920-21 is no longer tied in second place, it's still among the longer downturns in recent American economic history.

UPDATE: That's a lie... I'm not sure why I said that in the second paragraph. I know exactly where this meme got started - the same place that most of the memes about the 1920-21 depression that are floating around there got started.

*The 1913-1914 recession was longer than 1920-21, but it was well under way by the time the Federal Reserve started operations, which is why I left it out of my "post-Fed" count. This recession endured 12 months after the passage of the Federal Reserve Act in December of 1913. I'm not sure when Fed operations started in 1914, so I'm not sure how long it lasted after the Reserve System itself got off the ground.

Assault of Thoughts - 1920s Edition - 11/19/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

If you haven't picked up on it by now, I'm quite definitively hooked on the 1920s. The founding era is still very important to me. The 1930s and 1940s are fascinating as well. And the populist era is growing on me. But it's the 1920s that has really started to capture my imagination. So here it goes:

- I recently stumbled across an article by Robert Barro and Jose Ursua in the Wall Street Journal tying the Spanish Flu to the 1920-21 depression! Fascinating! I'm sure there is a paper they're basing this on, which I really need to track down. I wish I had had this when I wrote mine. Oh well. I remember looking at life tables in my demography class that captured the Spanish Flu - it was a surprisingly large spike. Interesting stuff. You would think that a negative labor supply shock like that would raise labor costs, though. I don't know - worth looking into. Barro and Ursua also seem to be looking internationally - perhaps it wasn't as big of a factor in the U.S.

- Andrew Sullivan notes that Bush's use of torture against terror suspects all but guaranteed the acquittal of Ahmed Ghailani on almost all his charges. In 1920 the New York Times took a more principled stance. On September 16th, 1920, a bomb planted by anarchists exploded on Wall Street, killing 38 people and sending shockwaves through the nation. The Times was firm, but principled. It talked about hunting down the terrorists "like wild animals", but noted that the very advantage of Americans was that we were "civilized" and that our society's "mental and spiritual resources" were "infinitely superior to anarchy". We hunt down terrorism. We fight it. But we don't descend into anarchy and terrorism ourselves in the process. Read the whole peace - it should be more widely read today.

- Finally, Hampton Stevens at The Atlantic discusses the upcoming Great Gatsby movie. He cautions that "Film versions of Fitzgerald's masterwork inevitably fail because of the kind of novel Gatsby is—frankly thin on story, but incredibly thick with introspection, thoughts unspoken, intricately woven metaphor, and long, dazzling descriptions of otherwise mundane things like sunsets, front lawns and angry wives that are only special because of how the narrator describes them."

Wages in 1920-21

Barkley Rosser recently reported Conference Board statistics on rising wages in the 1920-21 depression. Needless to say, I'm quite perplexed and intrigued - I found falling wages in three different time series that I looked at. I didn't have the Conference Board wage statistics, although I do happen to own the Conference Board's volume on prices which I did use in the paper... curious... need to investigate.

By the way - I'm continuing to collect tid-bits about 1920-21, so if you see something interesting, pass it along. I ain't done with this one yet.

Three Links on 1920-21

I just wanted to note these quickly:

- Jonathan Catalan has a thougthful post on Austrian methodology and my 1920-21 paper, with a lively comment section. I think he's obviously right that I'm taking a positivist approach to economic science. Whether Austrians want to play that game with me is clearly up to them. Jonathan makes a case that Austrians should think carefully about this. Either way, the point may be moot when it comes to 1920-21. My basic argument is that while we can say a lot of interesting things about it and I think we should study it more closely, it ultimately is not a case that can arbitrate between Keynesianism and the Austrian school. As far as I can tell so far (and of course I'm just at the beginning of my study of the episode), it's consistent with both stories.

- This blog, called "Social Democracy for the 21st Century: A Post Keynesian Perspective" (Post-Keynesian as in Galbraith/MMT, not "after Keynesian") has a very thorough post up on the 1920-21 downturn and also mentions my paper at the end. I haven't been able to fully digest this post yet, but it does a lot of good bibliographical leg-work. The blog itself is Post-Keynesian, so it's going to be a little left of me - and it also seems to engage the Austrian school a lot (and more harshly than I do). I'm going to start following it, so if anything interesting comes up I'll share it here.

- Prometheus 6 does not mention my paper, but does have a post up on the Harding election, the 1920-21 depression, and the lead up to the Great Depression. It's interesting - he takes an approach that is skeptical of corporate interests and laissez-faire capitalism, but it also attributes the Great Depression to boom-time shenanigans by the Fed after 1920-21. I don't think that idea is entirely crazy - certainly the crash was a result of loose monetary policy, and the crash was a contributor to the depressionary demand shock. I guess I just found it interesting because usually more left-of-center perspective blame the Fed for their response to the Depression rather than the run-up to the Depression. Either way - I don't know exactly where this guy is coming from politically/philosophically, but I thought it was worth resharing.

These are some exciting discussions that are going on. We are really cutting into the just-so stories that guys like Woods and Murphy promote about 1920-21. That's fantastic!