Lessons from Economic Recessions II- The Forgotten Recession of 1920

Last week I wrote in my post Lessons from Economic Recessions- Introduction and Great Depression:

History teaches lessons- it allows those of us in the present to see how results in the past worked. Economic recessions are a great teaching tool for policy makers and average citizens, because they teach us how the recession may have happened and how to emerge from the recession and therefore inform us as to the policy actions that we must take and those that we as citizens must support.

In that post, I talked about the lessons from the Great Depression. The lessons that I drew from the Great Depression are based though not on just data from that event, but from other recessions that our nation has entered and exited. Most liberals simply say 'government spending got us out of the Great Depression', but when I ask them about all of the other recessions that the United States entered, they have a blank look, as they do not have any knowledge of other recessions or how we emerged from them as a nation.

One of my friends in the media should try this sometime- ask a liberal policy maker- President Barack Obama, or Nancy Pelosi, or Carl Levin, or Debbie Stabenow, or Gary Peters- ask them what lessons they have personally learned from the Great Depression. I am sure they will roll off some long-winded answer that sounds educated and learned but basically boils down to 'spend more money.' Follow-up that question with a question on what lessons they learned from the Depression of 1920-21, or The Panic of 1907, or the Long Depression of 1873–79, and you'll be sure to get blank looks from these policy makers, as they don't have any knowledge about those recessions and have learned no lessons from them. They might even snap back some response to you about how unimportant it is to learn about other recessions- but they are wrong, because if you only draw your lessons on economic policy from one recession, the Great Depression, and your lessons are wrong at that, than you are sure to be wrong about very big and important policy decisions that have real effects on our nation.

Of course, my blog should not be the source for your education- I would advise you to spend some real time studying some real economists- but at least the knowledge that I display here and the lessons that I draw here are likely more educated than those of the above policy-makers, including our Harvard-trained President of the United States. So let's discuss today the The Forgotten Depression of 1920.

The Depression of 1920–21, which was an extremely sharp deflationary recession in the United States that lasted from January 1920 to July 1921, which at 18 months in duration is longer than any of the recessions after WWII, and which saw a GDP decrease of anywhere from 3% to 7%. The recession of 1920–21 was characterized by extreme deflation- anywhere from 13% to 18% — the largest one-year percentage decline in around 140 years of data. Unemployment jumped anywhere from 4 to 6% in one year, the AT&T Index of Industrial Productivity showed a decline of 29.4%, and stocks fell dramatically during the recession. It was a very bad recession that led many in society to question the stability and future of the American system of capitalism.

At the time, Secretary of Commerce Herbert Hoover — later President Hoover- urged President Harding to consider an array of interventions to turn the economy around. Hoover, as we all know now, was a progressive Republican who believed that active government response by government officials who were smarter than the rest of us could shorten a recession and led to economic growth. Hoover advocated the same policy responses in 1920 that he implemented in 1929- increased spending by the government, increased taxes especially on the evil rich, increased regulation of businesses, bailouts for banks and 'too big to fail' companies, continued support to labor unions, and more government agencies and boards to organize and improve our existing economic system.

As you can see, the responses that Hoover advocated in 1920 and implemented in 1929 are very nearly the same policies that President Obama implemented in 2009. The results of these policies are seen today and were seen in 1929- but not in 1920 because President Warren Harding ignored Hoover and did the exact opposite as what he recommended. Whereas Hoover pushed for more government spending, Harding decreased it; when Hoover wanted more regulation, Harding put in place less; for every board of smart elites that Hoover proposed to control human action, Harding cut boards and agencies so that the common man could be more free; and Harding ignored demands to raise taxes and instead slashed taxes.

The result of Harding's more conservative approach to the severe recession of 1920-1921? The recession ended quickly and ushered in an amazing period of robust economic activity the continued throughout the 1920's as Harding and Coolidge continued conservative policies. It is no surprise that the limited government, balanced budget, low taxes, low regulation, and unleashing of human freedom led to the Roaring Twenties, an amazing period in American history of social, artistic, and economic dynamism, while the active government, increased taxes, massive government spending, and more regulation of the progressive Hoover and liberal Roosevelt led to the Great Depression.

Thomas E. Woods (author of The Politically Incorrect Guide to American History, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, and Rollback: Repealing Big Government Before the Coming Fiscal Collapse) recently wrote a great post on this subject called The Forgotten Recession- I advise you to read the whole article, but here are several important pieces of it:

...It is hardly necessary to point out that Harding's counsel — delivered in the context of a speech to a political convention, no less — is the opposite of what the alleged experts urge upon us today. Inflation, increased government spending, and assaults on private savings combined with calls for consumer profligacy: such is the program for "recovery" in the 21st century.

Not surprisingly, many modern economists who have studied the depression of 1920–1921 have been unable to explain how the recovery could have been so swift and sweeping even though the federal government and the Federal Reserve refrained from employing any of the macroeconomic tools — public works spending, government deficits, and inflationary monetary policy — that conventional wisdom now recommends as the solution to economic slowdowns. The Keynesian economist Robert A. Gordon admitted that "government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive.… Despite the absence of a stimulative government policy, however, recovery was not long delayed."...

...There was nothing at all unusual about the pattern of American wealth in the 1920s. Far greater disparities have existed in countless times and places without any resulting disruption.

In fact, the Great Depression actually came in the midst of a dramatic upward trend in the share of national income devoted to wages and salaries in the United States — and a downward trend in the share going to interest, dividends, and entrepreneurial income. We do not in fact need the violent expropriation of any American in order to achieve prosperity, thank goodness...

...Harding's inchoate understanding of what was happening to the economy and why grandiose interventionist plans would only delay recovery is an extreme rarity among 20th-century American presidents. That he has been the subject of ceaseless ridicule at the hands of historians, to the point that anyone speaking a word in his favor would be dismissed out of hand, speaks volumes about our historians' capabilities outside of their own discipline.

The experience of 1920–1921 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920–1921 depression. It is because those things were avoided that recovery came. The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode — and observe how hastily our interrogators try to change the subject....

Read the whole article- the logic, the understanding, the theories, and the explanation are all in there, and go into economic terms and theories that I am only beginning to gain an understanding of.

The lessons that I drew regarding the Great Depression are supported by the lessons that one can learn from the Recession of 1920-1921- that economic recessions are worsened and lengthened by a government that takes away human liberty, treats people as numbers to manage, takes wealth and property from those who have earned it, and that in every other way violates the Founding Principles of our nation (limited government, federalism, and separation of power). It is up to policy makers to learn those lessons and to vote accordingly on future legislation facing our nation.

Keep reading my blog regularly for future posts on this subject, and I continue becoming educated and drawing lessons from other past economic recessions that our nation faced and overcome.