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Defending the Austrian Interpretation of the 1920–21 Depression: Reply to Borazan

Patrick Newman argues that the 1919-1920 business cycle was due to monetary expansion, and that Borazan's (2023) "administrative decree" about resuming expansionary policy is inapplicable. Wage cuts aided recovery.
Patrick Newman
The Quarterly Journal of Austrian Economics, Vol. 26, Issue 4, 2023. Notes and Replies, February 08, 2024


In Newman (2016), I argued that the Federal Reserve’s monetary expansion in 1919 generated an inflationary boom that forced it to raise interest rates, thereby precipitating a sharp contraction in 1920. Recovery began because businesses cut nominal wages, and this occurred before the Fed’s 1921–22 easing reached the economy. In contrast, Borazan (2023) attributes the boom to government spending and speculative inventory investment and the recovery to an “administrative decree” about the return to expansionary monetary policy, among other contributors. This reply argues, first, that Borazan’s analysis ignores the role of the Fed’s expansionary policy in causing the boom and the resultant inflation. Second, I show the inapplicability of Borazan’s administrative decree and revisit the importance of market-based wage cuts in generating the recovery.


Patrick Newman is an assistant Teaching Professor of Economics at the University of Tampa. He is also a fellow of the Mises Institute.