A Tale of Two Depressions: The Forgotten and The Great

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Is history written by the victors? A conflict of ideologies was waged during the forgotten Depression of 1920-1921 and the Great Depression of the 1930s, a battle between opposing economic doctrines that would establish a precedent for how policymakers respond to future financial crises. But the efficacy of tightening, curtailment, and non-intervention was censored by the authors of the 3×5 card of allowable opinion, giving big government acolytes the opportunity to proselytize in academia and media about the virtues of perpetual intervention. The two depressions unfolded a century ago, but the consequences of expansive fiscal and monetary stimulus, relief, and moral hazards infiltrate modern-day public policy.

Remembering the Forgotten One

Before America kicked off the Roaring Twenties, the United States was forced to pay for the guns and butter of the First World War through a severe depression that lasted from January 1920 to July 1921. The unemployment rate soared to 12%, the gross national product (GNP) plummeted 17%, and the Dow Jones Industrial Average cratered 47%.

It was challenging for the U.S. to transition from a wartime economy to a peacetime one, witnessing a dramatic influx of soldiers returning to the civilian labor force. This was in addition to the Spanish Flu pandemic that killed approximately 670,000 Americans, a tragic public health crisis that weighed on the national economy.

The country was also shocked by the changes to fiscal and monetary policy. Facing an exploding national debt, the federal government slashed spending by 66%, bringing the budget from $18.5 billion in the fiscal year 1919 to $6.4 billion in FY 1920. The Federal Reserve sharply raised interest rates to as much as 7% to combat the 20% inflation rate – the central bank abandoned tightening for easing later that fueled the epic growth of the 1920s.

So, when the U.S. faced a sharp 18-month downturn, how did Washington and the central bank respond? The federal budget was cut by another $3 billion, and income tax rates were decreased. The Fed refrained from loosening policy, maintaining its efforts to rein in the growing cost of living. President Warren Harding had slammed his predecessor, Woodrow Wilson, for not responding fast enough to the depression. However, by the time Bill Clinton’s adulterous precursor convened a President’s Conference on Unemployment, established committees, and signed emergency tariffs, the depression was finished.

Still, the Republican administration had planted the seeds for Presidents Herbert Hoover and Franklin Delano Roosevelt to initiate aggressive interventionist mechanisms. As legendary economist Murray Rothbard wrote in his seminal America’s Great Depression:

“While the government did not greatly intervene in the 1920–1921 recession, there were enough ominous seeds of the later New Deal. In December 1920, the War Finance Corporation was revived as an aid to farm exports, and a $100 million Foreign Trade Financial Corporation was established. Farm agitation against short-selling led to the Capper Grain Futures Act, in August 1921, regulating trading on the grain exchanges. Furthermore, on the state level, New York passed rent laws, restricting the eviction rights of landlords; Kansas created an Industrial Court regulating all key industries as “public utilities”; and the Non-Partisan League conducted socialistic experiments in North Dakota.”

Nonetheless, after this abysmal time, production boomed, employment ramped up, credit markets normalized, and the free-enterprise system exploded – all of this without government overreach. The establishment wants the “Forgotten Depression” relegated to nothing more than a footnote in American history. The results contradicted everything the gatekeepers have professed during and after each recession, depression, slowdown, downturn, and every euphemism in the economic textbooks.

The Great Depression

Hoover’s and FDR’s responses to the Great Depression forever altered the fabric of the American economic landscape. The federal government metastasized into a deity that became responsible for citizens from the cradle to the grave, abandoning fiscal responsibility and introducing a treasure trove of progressive goodies. Social Security, the National Relief Administration, public-works projects, price controls, and astronomical (for the time) deficit-financed spending were all the characteristics of the 1930s mantra.

It has been the consensus that FDR’s New Deal rescued the U.S. economy. But a growing number of experts are coming around, conceding that his policies prolonged – not ended – the depression. Eminent historian Thomas Woods described the outcomes of the president’s proposals as “the downturn-within-the-downturn.” Some will contend that World War Two’s enormous expenditures supported economic growth, which, too, is fallacious.

So, what did the New Deal accomplish? Officials tasked with devising fiscal and monetary policy adopted the mentality of the 1920 Japanese government. Instead of allowing the economy to cleanse itself of illiquid excess, U.S. officials mirrored the elements of Tokyo’s path to a planned economy: decimated market freedom, prohibited commodity deflation, and fostered collusion between the big banks, industries, and policymakers.

Much like the ‘20s became the first lost decade for Japan, America endured similar circumstances in the ‘30s. In the end, the panacea for the Great Depression was the post-war recovery: budget cuts, consumers’ pent-up demand, greater investment spending, and robust exports. One of the few things that FDR got right at home was abolishing prohibition. Americans needed hooch to survive the era’s lawmaking apparatus.

Studying the Past

It is routinely stated within politics that if society does not study the past, it is doomed to repeat it. Unfortunately, the public policymaking anointed have combed through the history books, selecting parts they want to mirror and redacting others of which they disapprove.

The two depressions within a decade of each other created an incredible and unintentional experiment in macroeconomics, as well as an indictment on the disciples of John Maynard Keynes, who have employed every interventionist trick found in The General Theory of Employment, Interest, and Money. It turned out that standing around, twiddling thumbs, and talking a lot was more of a cogent prescription for an economic calamity than damning the torpedoes and firing full speed ahead that has become the de facto reaction.

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Read more from Andrew Moran.

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