The Forgotten Depression: 1921: The Crash That Cured Itself

James Grant is a great writer because, in an easy-going, conversational but not trite style he portrays clearly and memorably what can seem a recondite and arcane subject. And in telling of his specific subject, he addresses the broader enduring subjects that are important today, which is the essence of good history.Here, Grant tells the story of the brutal but short 1920 depression, that was the great depression before followed by the one we know today. In so doing, he addresses the gold standard and why the laissez faire policies implemented then made the first depression pale in comparison to the second, where laissez faire was shunned in favor of scientific, technocratic intervention. Included are many concise biographies and commentaries on the actors in the drama of the time.Concise, but rich in information and sources. A great read for anyone interested in history or economics. It is an inexpensive way to enjoy the delights of a writing style that is vanishingly rare today and regularly available only through a very expensive subscription to Grant's Interest Rate Observer.I wish the kindle version linked in text to the photographs at the end of the book. This edition nicely distinguishes informational footnotes (in Roman numerals) from source footnotes (Arabic), a technique that should be emulated broadly.

Recently a political conservative on Fox News said that President Franklin Roosevelt “guided us through the the Great Depression.” He did no such thing. He inherited a severe but necessary market correction; thenceforth he implemented several hopeful programs because like his predecessor President Hoover, he felt he had to Do Something. Hoover's and then Roosevelt's programs created the Great Depression that continued throughout the 1930s.President Warren G. Harding also inherited a severe but necessary market correction. On December 21, 1920, the Dow closed at 66.75. The slump was, in percentage terms, worse than the crash of 1929. Baffled by conflicting advise from his economic advisers, Harding humbly admitted that he had no idea what to do. So he did nothing dramatic. He acted on the advise of his able Treasury Secretary Andrew Mellon , who advised cutting taxes, interest rates, and public spending. Harding courageously refused Veterans' demands for a bonus. Businesses responded when they realized that Harding would not do anything unexpected. By July, 1921, the economy began recovering. Financially, America entered the Roaring 20s.As I read James Grant's book, I kept saying to myself, “It's about time that someone wrote this.” Harding has gone down in history as a failed president, known only for the financial scandals, of which he was innocent, that were uncovered after his untimely death. To be sure, Harding was no financial wizard. And he was not without feeling for those suffering from the crash. His reluctance to extend government assistance to the needy proved to be the right course. Resisting political pressure to Do Something, he prevented a long lasting depression.Grant delineates a number of related subjects. He provides an overview of how the Crash of 1920 developed. He explains the role of the newly created Federal Reserve Board. There are many conservative populists who harbor conspiratorial suspicious about the origin of the Fed. They need to know better. Grant understands that the decisions of the Fed were partially the result of the fact that the Fed was designed to function in peacetime but as soon as it became functional it had to immediately deal with a world war. Grant gives a solid account of inflation. His statistics may seem overwhelming to some readers, but they are necessary to make his case. Some of his financial terms could have used a little more explanation. He has kind words for a gold standard. Finally, Grant does not omit the role of participants. Events that change historical directions are not merely the result of impersonal forces.The plain truth is that the simple Warren G. Harding successfully handled a potentially horrific depression. Dr. Woodrow Wilson did not, but given his favorable comments on socialism, he would have attempted to fix the economy had he not been focused on the League of Nations and then because of his failed health. Stanford educated Hoover and Harvard graduate Roosevelt failed because they did not trust the market to self-correct. Their failures should serve as a lesson for activist presidents. Note to economics students: If your professor does not assign this book, read it yourself.

In The Forgotten Depression, James Grant (well- known for his Interest Rate Observer newsletter) argues that a non-interventionist policy would work better than the active response to the Great Recession. Historically this was tested in the depression following the inflationary period created by World War I. After a short period of negative growth, the financial system cleared itself through deflation of both prices and wages. This led to the good times of the 1920s. He contrasts this to the desire to “do something” by the Federal Reserve and Hoover administration in the early period of the Great Depression. By artificially holding wages high and insisting that owners lower their profits, he argues that unemployment was much higher and longer than necessary.This laissez-faire policy led to a self-fulfilling confidence that the bad times would not last long despite reports that this downturn was the strongest of 14 business-cycle contractions since 1812. Following the war Russia had seen a workers’ revolt and the Communist Party was active elsewhere, including the United States. Previous wars had been followed by depressions, driving expectations.Interestingly, the author does not address two questions that immediately come to mind. World War II was followed by an economic expansion, not a depression, and one could argue that the backstop of the Federal Reserve Bank generated the trust in the system that resulted in no run on the bank. Second are the obvious differences between 1920 and today. Following WW I the U.S. had recently become an international creditor and exports exceeded imports. Neither is true today. Other changes were also underway. Gold no longer needed to be physically moved, and the ramifications continue to play out. The greater interconnectedness of the world economy today, with no gold standard and fiat currencies, makes it hard to state that any specific policy would have worked better in today’s environment but Grant’s arguments would leave government balance sheets in much better shape and deserve discussion.“There is nothing new except what is forgotten.” Rose Bertin

Excellent short account of the 1921 depression in the United States, which was by some measures just as steep or steeper than the slump in 1929. The author argues that the ground for the crisis was laid in the massive inflation of the war time years (1917-1918), which resulted in a massive upswing in lending and significant investments in unsustainable ventures. Despite the Coolidge administration's laissez-faire response to the crisis (or perhaps because of it) an economic recovery was in full swing before the end of 1922. The author argues that this was in part due to the normal operation of the gold standard (as wages and prices fell, gold flowed back into the country). An important book to read - will stimulate clearer thinking about the to current Keynesian consensus.

James Grant is one of the few economists with long track record of seeing almost any crisis event before it actually happened - from the Japan bubble in the 80's through the dot com bubble of the 90s to the real estate induced crash in 00's. In this book Grant reminds us of one of the crashes that was easily forgotten. Unlike the Great Depression, the crash of 1921 did not inspire scholars like Bernanke or Friedman. Grant offers an interesting perspective why this is the case.

Let me begin by saying that I am a libertarian/classical liberal and therefore I am very receptive to the laissez faire message that this book puts forward. I bought it hoping that it would help me make this argument. I was very disappointed.There is almost no economic analysis in this book. Instead of a detailed analysis of macroeconomic trends, government policies and the causal connections between the two, we get an observation that there was no countercyclical policies (which is probably true) and then an observation that after a severe deflation, the economy rebounded on its own (which is also probably true). But all of this could have taken one chapter. There are also some assertions about the "activist" response to 1929 and how this might have been counterproductive, especially since the attempts to maintain wage rates and commodity prices almost certainly led to greater unemployment. This could have been another chapter.The rest of this 200-page book is filled with pointless vignettes about things like Comptroller of the Currency John Williams and his views on various financial institutions. There are also lengthy discussions about price/earnings ratios on the stock market, the Bonus Army, Benjamin Strong, Du Pont, etc., etc., etc. All interesting, yes, but all totally irrelevant to the central question.There is a real useful case to be analysed here, particularly comparing and contrasting this "depression" with the great one. Unfortunately, James Grant has not produced this.

This book helps explain the power of the free market and what went so wrong a decade later. To fully explain the Great Depression, one needs to fully understand the 1921 Depression.