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20150821 The Forgotten Depression


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The main idea of this book is to demonstrate that usual condemnation of Laissez Faire approach to economy as cause of the Great Depression is based on false narrative. This narrative presents late 20s as period of unabridged capitalism that led inevitably to disaster. Instead of just critiquing this narrative directly author looks at previous depression of 1920-21 when capitalism was a lot less constrained than 10 years later. In 1920-21 the federal government was run by debilitated Wilson who was not capable and later on by hands off Harding who was unwilling to interfere, resulting in much more Laissez Faire than under “great engineer” Hoover. Author quite convincingly demonstrates that 1920-21 depression was as severe or even more so than 1929, but without government intervention prices and wages dramatically went down, unemployment went up resulting in quick achievement of equilibrium and dramatically fast recovery.


  1. The Great Inflation

This chapter is about events preceding depression of 1920. It starts with events of WWI and wartime inflation that followed by contraction of production as result of cancelation of war orders in 1918.However instead of depression it was followed by boom due to consumer demand delayed by war and growth of Europe needs for reconstruction at least partially financed by US Treasury loans. However all this demand supported by money outrun production abilities, leading to inflation of 18.6% in 1918 and 13.8 in 1919. These problems caused significant labor disturbances and strikes. Another consequence was illusion of wealth making lots of people especially farmers borrow too much and overinvest into expansion.

  1. Coin of the Realm

This chapter is about monetary issues of the period starting from 1880 to 1900 when sticking to gold standard combined with fast growth in productivity produced significant deflation before it was substituted by inflation of progressive era. Despite dollar being convertible into gold, the money supply grew dramatically due to influx of European gold attracted by high interest rates. Author also discusses economic thinking of the period especially ideas of Fisher.

  1. Money at War

This is discussion of role of Federal Reserve with its gold supported notes in financing the war. It also reviews money movements during the war with initial withdrawals by Europeans at the beginning of war that followed by massive transfers to USA as payments for war materials. FEDs also increased money supply by supporting government Liberty bonds.

  1. Laissez-Faire by Accident

This is analysis of situation after WWI when due to sum of unexpected events American economy had chance to work in mode close the Laissez-Faire. Probably one of the most important events was temporary decapitation of American bureaucracy, due to Wilson’s stroke. As prelude author reviews two attempts of hands on control over economy: failed attempt to substitute Du Pond company with government controlled production for powder and Harry Garfield’s attempt to manage fuel that also failed spectacularly.

  1. A Depression in Fact

This chapter provides statistical justification to idea that slowdown of 1920 was indeed depression quite comparable to Great depression 1929. It also reviews and reject attempt by Christina Romer to decrease its scale and significance. The numbers for GNP is decline by 24% and unemployment 15%. Author brings in analysis of different industries from automotive to agriculture to support his point.

  1. City Bank on the Carpet

This is story of National City bank and Fed’s Comptroller of Currency John Williams who was overconfident in stability of banks just before depression. In reality many banks were overextended and National City was deeply in betting on sugar prices. Williams pressed the bank with investigations of not only its solvency, but also of corrupted practices.

  1. Egging On Deflation

Here author reviews Feds expansion of money supply to fight deflation with more than 100% of banks’ required reserves were provided by Fed on loan. However Feds abilities were limited by requirements to keep gold as reserve for Fed banks. Eventually they had to vacillate between fighting deflation with increase of money supply and inflation with increase of rate to 6%

  1. A Debacle “Without Parallel”

This is review of depression depth in terms of crash in commodity prices and stock market, which lost 39% of its value. Taking all together, the decline was unprecedented.

  1. The Comptroller on the Offensive

This is review of action of outgoing Comptroller Williams who was trying preventing increase in rate to 7% in addition to dealing with banks and trusts some of which like Guaranty he was fighting.

  1. A Kind Word for Misfortune

This is review of typical approach of American at the time to phenomenon of depression. It was considered a natural process of readjustment of economy to changing circumstances that had to occur for it to remain healthy. There is nothing to be done and one just had to go through it. The idea that massive government intervention could remove depression was already around, but it did not obtain massive support yet.

  1. Not the Government’s Affair

This is review of political environment and ideology in 1920 when both political parties consider economy mainly out of scope for political actions limiting such actions to monetary policies. Republicans hit Democrats with accusation of making dollar worth 50 cents and that was about it. Both parties complained about high cost of living, but Harding won overwhelmingly after promising do nothing with his slogan of “returning to normalcy”.

  1. Cut from Cleveland’s Cloth

This chapter is about initial actions of Harding presidency. As promised they cut down government expenses and resisted demands for public payments to veterans what later turned into demand for bonus.

  1. A Kind of Recovery Program

This is very brief review of Treasury secretary Andrew Melon actions directed at decrease of marginal tax rates. This counterintuitive move led to dramatic increase in tax revenues, as Melon had expected.

  1. Wages Chase Prices

This chapter starts with review of stock market movements prior to election then discusses process of deflation when downfall of prices led to decrease in wages. It caused significant disturbance by labor movement despite the fact that prices went down much faster than wages so real purchasing power grew. All that Harding administration did was to provide arbitrage services in extreme cases of union vs. management fights.

  1. Shrewd Judge Gary

This is story of Judge Gary namesake of steel town in Indiana. After presiding over multiple commercial cases, usually being supportive to business, Gary left law to become president of Federal Steel Corporation and was quite successful in withering economic downturn in part because he managed to make significant share of employees into shareholders, achieving improvement in morale and dedication of workforce.

  1. “A Higher Sense of Service”

This is continuation of analysts of political attitudes to the role of government in economics. Despite republicans being pro business and democrats being pro government, both sides saw business cycles as inevitable natural phenomenon. Even so the seeds of future government expansion were planted inside both parties with Harding proposing creation of public welfare department and Hoover busy building all kind of schemas for government intervention just about everywhere.

  1. Gold Pours into America

This is review of international economic position of United States at the time. As consequence of WWI it was highly advantageous, with USA exporting nearly double of its import and gold flowing into America from Europe. Eventually it stopped deflation and monetary situation started to turn around in early 1920.

  1. “Back to Barbarism?”

This chapter provides some examples of how American companies managed to get through this short depression by managing inventories, prices, and labor. Examples provided for DuPont, White Motor Company – the biggest trucks manufacturer at the time, and Sears. Overall American business had dramatic decrease in profits in 1921, which pretty much rebound in 1922. Author also discusses home construction and agricultural sectors.

  1. America on the Bargain Counter

This is analysis of impact of depression on various businesses with conclusion that it was very tough on businesses encumbered with excess inventory and rigid contracts and they suffered, while more flexible and liquidity rich business not only survived, but also prospered. By the end of 1921 depression was over and roaring 20s had begun.

  1. All for Stability

This is description of results and impact of this deep, but brief and self-healing depression. On one hand it proved that economy would self adjust if left alone, while on the other hand it demonstrated depth of pain and suffering that could be caused by even brief downturn. It caused search for controlling mechanisms capable to avoid this pain by using government power. The most well known were Keynes’ ideas of government intervention in business cycles by increasing spending during downturn. In America it was Fisher’s ideas of stabilization by controlling money supply. Eventually it became part of Feds mandate, when mechanism of purchasing Treasury securities by Fed was put in place.

Epilogue: A Triumph, in Its Way

Here author provides summery of events and consequences and discusses fate of main players.


I think it is a pretty good analysis of factual data and events of depression of 1920-21. It slightly overburdened by history of banks and monetary policy of Fed, but other than that it is a good narrative of period. Certainly each period in history unique so it is not possible to prove counterfactual ideas what would happen if in 1929 Hoover did what Harding did in 1920, that is exactly nothing, but in my opinion comparison of these two depressions provides good illustration of conceivable outcome. I personally believe that the issue here is more philosophical than political and it is idea that super complex information system that includes hundred of millions of self-directed human beings is not possible control and manage effectively via centralized hierarchical system of several hundred thousands of bureaucrats. The only way such system could possibly function effectively and efficiently is via self-regulated system of market economy, which is while not perfect, but at least functional, while bureaucratic system either in its deadly form of central planning or less severe form of regulatory state is typically dysfunctional.

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