Much ado has been made about the Great Depression and of the Panic of 2008, whose effects we’re still feeling. Here is a brief history of another economic depression, one that could have had devastating impact, the depression that occurred in the US in 1920-1921.
In the 18 months between January 1920 and August 1921, our unemployment rate jumped to 14% or so from about 2%, as estimated from the times’ inexact records; wholesale prices fell more than 40%; and industrial production fell 23%. From peak to trough, the total of checking accounts and currency fell by nearly 11%. Some today might have considered the survival of the banking system as a whole to be in the wind. The farm economy also was hard hit, and there were waves of business failures. What interventions did the government effect to rescue the nation from this devastation? The most effective intervention a government can execute with a free economy: it sat on its collective hands and let the economy right itself.
The Harding administration very deliberately ran a budgetary surplus. The Fed, with less than a decade’s worth of bad habits to influence it, raised interest rates, increasing the cost of money (and increasing the value of savings). In response, the economy in 1922, the first full year of recovery, increased industrial production more than 27%, and by 1923, unemployment was back down to 3%.
What happened? Market forces, unfettered by Know Betters in the government, happened. The US and our goods and services were dirt cheap, and bargain-hunting investors from overseas jumped on the opportunity with both feet. No central banker had to instruct investors in what to do with bargains. Money flowed into the US, and this inflow delivered a powerful monetary stimulus.
Moreover, that 40% drop in prices meant that Americans’ dollars were able to buy more. This increase in the value of our money—wonks call it the “real balances effect”—enabled Americans in our aggregate to begin again to buy goods and services. Which stimulated demand for new production, which stimulated job creation.
And those banks that a Hank Paulson might have panicked over? The biggest casualty was the little First National Bank of Cleburne, Texas, with its deposits of $2.8 million. That certainly hurt those Cleburne depositors, but the damage was that limited. No bank was “too big to fail” in those days, and no big bank did.
That depression lasted all of 18 months, and over its course—one more little tidbit—the nation’s debt was reduced by nearly 6%, to a shade under $23 billion. The Great Depression lasted 10-17 years (depending on who you read) and added billions to our debt—even before WWII, and the Panic of 2008 is still being felt four today, years later, and our national debt still is exploding by trillions of dollars per year.
Yet the Obama administration has cynically ignored the lessons the Harding administration could teach about not intervening in a free economy. Rather, Obama and his “advisors” have chosen to listen to a fellow Progressive, Franklin Roosevelt, and so to ignore the manifest failures of government intervention into that more publicized depression. Obama has chosen to double down on those failures with his own interventionist policies, which are exacerbating the Panic of 2008, and the ongoing recession still ensuing (never mind the “official” end of the recession in 2009—ask the millions of Americans who are out of work, and the millions more who have given up and abandoned the labor force altogether, how their recovery is going).
Worse (if that’s possible), the supposedly independent Federal Reserve System has been entirely complicit in these interventionist policies, what with its freely running dollar printing press, its QE2 (preceded by a QE1—why do these sound like failed luxury cruise liners?), its Twist, its artificially depressed interest rates (so much for the widows and orphans who need their savings for living), and so on.