Capital Markets Lab
Markets in History
Quotes on the Fly
Excerpt: "In 1920, the American economy entered what would presently be diagnosed as a depression. The successive administrations of Woodrow Wilson and Warren G. Harding met the downturn by seeming to ignore it—or by implementing policies that an average 21st century economist would judge disastrous. Confronted with plunging prices, incomes and employment, the government balanced the budget and, through the newly instituted Federal Reserve, raised interest rates. By the lights of Keynesian and monetarist doctrine alike, no more primitive or counterproductive policies could be imagined. Yet by late 1921, a powerful, job-filled recovery was under way. This is the story of America’s last governmentally unmedicated depression."
The Forgotten Depression is a remarkable analysis by author James Grant of the Depression that didn’t make history and that nobody talks about, draws experience from or use as an example of successful remedy. In this respect, the author notes: "In any case, to the best of my knowledge, no American policy-maker invoked the extraordinary events of 1920–21 as a potentially relevant precedent during the crisis of 2008; the collapse of 1929–33 rather monopolized the market in historical analogy."
The reason for this anonymous success (or non-failure) might be that it went against mainstream textbook economics, by not requiring any government intervention, with actors agitating dramatic headline such as the “New Deal”, or using the circumstances as a platform to promote their policies (and themselves!). It might also simply be the fact that the main protagonist of this crisis was the absence of any, replaced by the market and the price as the principal arbitrator mechanism.
As the author points out: "Here is a history of instructive inaction." He further adds: “…the non-intervention of Wilson and Harding constitutes an uncelebrated success." James Grant then remarks “The hero of my narrative is the price mechanism, Adam Smith’s invisible hand. In a market economy, prices coordinate human effort. They channel investment, saving and work."