Sunday, May 03, 2009

Why you've never heard of the 1921 Depression

Despite a greater economic meltdown in 1920 than the one seen in the wake of the 1929 Wall Street Crash, the Great American Depression of 1921 never happened because the US government of the time did absolutely nothing to 'solve' the problem, except cut its own spending.

The American economy was up and running, with barely a blip, within less than a year.

Do you think this 'lesson of history' might tell us something about what to do now, with our own economic meltdown?

Tom Woods explains.

6 comments:

not an economist said...

Austrian's argue that the boom of the 1920's - a decade known as the roaring twenties - caused the crash of 1929. A classic Business Cycle theory event, monetary expansion causing a plethora of malinvestemnts that collapsed once the boom popped.

Doesn't this sort of imply that the recovery from the 1921 recession was in fact due to the monetary boom that caused the boom in the 20's? It wasn't sustainable any more than the "Castle in the Air" that Brown built after 1997: just another decade of wasted malinvestment.

Its therefore hardly appopriate to suggest that the rapid recovery after the 1921 recession was due to the govt following Autrian policy prescriptions.

If this is wrong then can you clarify exactly what I am missing?

Jack Maturin said...

The crash in 1920 was caused by the dollar inflation created by the Fed to pay for the American involvement in World War I. The Fed itself was created in 1913, and in 1920 did not yet know what to do to 'solve' the crash that its inflation had created.

Once the recession and the cut in government spending had done its work in popping this post-war bubble, the Fed then started ramping up the printing presses from the inauguration of President Coolidge in 1923 onwards, once Harding had died, doubling the money supply in about six years, once President Harding was safely out of the way.

This inflationary boom created the 'Roaring Twenties'.

If the crash of 1929 had been followed by a similar cut in spending, as happened in 1920/21, the bust would probably have been over by the end of 1930, hence no depression, possibly no Hitler, and possibly no WWII, but all paper currencies eventually become worthless, so given the creation of the Fed, it was only a matter of time before a terrible cycle of depressions took root.

We were lucky in 1920. Because the Fed had only been going for seven years, it wasn't in its stride. But it would soon get into this stride, once Harding died in August 1923.

The next great depression, following the 1930s, was the stagflation of the 1970s, which was a reaction to coming off the Bretton Woods gold standard, by Nixon, after the great inflation of the 1960s to pay for all of that guns and butter of the Vietnam war and the expansion of the 'Great Society', at one and the same time. All the booms and busts since have been reverberating from that 1970sdepression, and the Great Depression we are currently in, is simply the end of the road for Nixon's closing of the gold window.

The dollar is finished. The pound is almost certainly finished too, though the Euro and the Yen look a little stronger. However, we will keep going with these cycles, until all of these paper currencies are dead and we instigate a 100% reserve commodity money standard, probably based on gold.

The world's governments will probably try a single global paper currency, but that will be even worse than having the dollar as the paper reserve standard.

See Thomas Woods' book Meltdown, for more information on this, or google any of the recent articles/podcasts etc, by Thomas Woods, on this subject.

Greg N said...

The Federal Reserve was created in 1913, largely to prevent the periodic recessions (panics) of the 19th century. Since 1913 we've had downturns in 1918, 1920, 1929, 1937, 1945, 1948, 1963, 1957, 1960, 1969, 1973, 1980, 1990, 2001, and the current fiasco. (http://seekingalpha.com/article/47291-u-s-expansions-and-recessions-an-historic-look-1900-2007)

Is it possible to believe the Fed knows what it is doing?

Jack Maturin said...

Oh it knows what it's doing, Greg. Ripping off the American (the world's!) people, to the benefit of the American ruling class.

Ralph Smorra said...

Was there any 18th centry bubble/panic cycle not caused at least indirectly by a pre-Fed bank-made increase in the money supply?

Jack Maturin said...

The Bank of England was created in 1694, and it was at the heart of most of the subsequent bubbles, though of course there were others in France and the US, similarly created.

The only bubble I know of which was not caused by fractional reserve 'money printing' was the Tulip Bubble, at the heart of which was the Bank of Amsterdam (BoA).

Here, the same mechanisms were at play, but just in a different way.

What happened in 1637 was that the BoA was the hardest 'hard money' bank in the world, with a 1:1 reserve of silver and gold against notes. Perfect, you might say.

However, as always, there is government lying at the root cause of the problem. This was the passing of laws in Holland on free coinage. I.e. if you took a lump of Spanish silver to Holland, the Dutch would turn it into coins for free (or for very low rates).

Subsequent guarantees and monopolies for the Bank of Amsterdam, backed by government fiat law, thus encouraged a rush of precious metal specie (gold and silver) into Amsterdam, to take advantage of these government 'rights'.

With the opening of new silver mines in South America, particularly in Peru, this led to a torrent of money into Holland, which thus formed the backdrop of Tulip Mania and the famous bursting of this bubble.

Aside from this very central-bank like story and peculiar government interference with the money supply, I'm not aware of any other bubble which wasn't at heart driven by the same mechanisms that have created the current burst bubble.

Here's some links:

=> http://mises.org/daily/2564
=> http://en.wikipedia.org/wiki/Tulip_mania
=> http://en.wikipedia.org/wiki/Bank_of_Amsterdam
=> http://mises.org/daily/3259
=>