Why You've Never Heard of the Great Depression of 1920

Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
  • #15806

    I’m posting here rather than in Austrian Economics mainly because it’s one of Tom’s great lectures, which I’ve listened to many times and shared with many. I’ve got a question on some stats. In the talk, Tom mentions that in 1920 production was down 21%, GDP was down 24%, and unemployment was up from 4% to 12%. I’m having trouble find sources for these stats. FRED doesn’t seem to go back that far, and http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321 shows much different ones. Some verification of these stats would help with a debate I am currently having, and I am sure will help in the future.


    Stanley Lebergott estimated that unemployment reached 11, 7% which is almost 12% (Wikipedia).
    If you look at these statistics, and if my calculation is correct then GDP was down 17%:

    On Wikipedia there’s a paragraph critical of Woods’s interpretation:
    “Daniel Kuehn’s recent research calls into question many of the assertions Woods makes about the 1920-21 recession.[14] Kuehn argues that the most substantial downsizing of government was attributable to the Wilson administration, and occurred well before the onset of the 1920-21 recession. Kuehn notes that the Harding administration raised revenues in 1921 by expanding the tax base considerably at the same time that it lowered rates. Kuehn also argues that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920-21 recession was not characterized by a deficiency in aggregate demand, fiscal stimulus was unwarranted. Economist Paul Krugman, who is critical of the Austrian interpretation, notes that the monetary base expanded significantly from 1922-1925, and that this expansion was accompanied by a reduction in commercial paper rates.[15] Allan Metzger suggests that deflation and the flight of gold from hyper-inflationary Europe to the U.S. also contributed to the rising real money stock and economic recovery.”

    I think Tom didn’t mention either the following two tariffs:
    But maybe they aren’t significant and aren’t worth to be mentioned.

    Consider the following articles:

    I’m sure you can refute some of the criticisms!


    For useful statistics the the period, Tom Woods cites Kenneth Weiher, America’s Search for Economic Stability: Monetary and Fiscal Policy since 1913 (New York: Twayne, 1992), pp. 26-37.

    Here is a NBER paper on unemployment in the U.S. from 1900-1954:


    The historical data on the St. Louis Fed’s website is FRASER, not FRED. You might search FRASER for data on production and GDP.



    Thanks Jeff Herbener!


    At some point I’ll post something about the Kuehn paper. I don’t think the tariffs play a role one way or the other, except to hurt the recovery, but by the time they went into effect the recovery was already underway.


    I hope you do because I think this is a very important historical event. Not so much for Austrians but rather for those conservatives who want to point to something to show that austerity(in the real sense) works. I’m sure somebody who could write a book on this topic would get some attention.


    Bob Murphy provided nine examples of successful austerity: http://mises.org/daily/4648.


    It appears this Daniel Kuehn is very well researched in his analysis and replies. He and “Lord Keynes” provide harsh critiques of Bob Murphy’s and Tom’s writings on the Depression of 1920 on this page of Murphy’s site: http://consultingbyrpm.com/blog/2012/10/krugman-on-the-1920s-a-one-act-play.html

    Hopefully Tom and Bob will respond with full force? It’s hard for a rookie like myself to sift through all of their empirical claims.


    Economic historian Jeff Hummel, an Austrian sympathizer but not himself an Austrian, writes:

    “[Kuehn] ends up mainly nit-picking details about timing and such. To the extent that the Austrians believe the ’21 depression was a necessary result of previous wartime malinvestment, I agree with Kuehn and the monetarists, that instead the Fed’s sudden tight monetary policy was the primary cause. But nothing Kuehn writes contravenes any of the essential points made by the three Austrians: that here is a depression, with significant deflation, that was quickly over without any offsetting government intervention.

    “Indeed, Kuehn’s most significant historical disagreement is not with the Austrians but with Milton Friedman, Anna Schwartz, and other monetarists. They attribute the Fed’s postwar tightening to concerns about gold flows whereas Kuehn argues that Benjamin Strong and other policy makers were only concerned about regaining price stability. But this strikes me as a distinction without much of a difference. None of the American policy makers at this time were advocating or even considering U.S. abandonment of the gold standard. Within that context, talking about price stability must implicitly invoke considerations about gold flows.

    “A second theme of Kuehn’s paper is that the U.S. government’s handling of the ’21 depression is not inconsistent with the views of Keynes. As we know, the “correct” interpretation of Keynes’s GENERAL THEORY has been endlessly debated by economists, given the work’s ambiguity. By emphasizing Keynes’s early writings and even citing Hayek, Kuehn enters the fray and does make an intriguing case that Keynes distinguished between two types of depressions: one, during which interest rates and investment are low, requiring fiscal policy: the other, during which interest rates and investment are high, allowing flexible wages to restore full employment. But unless I missed something, Kuehn seems to obscure the critical difference between a disinflation that restores price stability after wartime inflation and actual deflation that nearly returns prices to their prewar level. While I’m prepared to accept that Keynes advocated the former, I am unconvinced that he really believed that the severe U.S. deflation of the early 1920s (steeper than that of the Great Depression) was necessary or desirable.

    “Kuehn chides the three Austrians for neglecting some recent technical literature in which modern Keynesians attribute the 1921 depression, at least in part, to a supply-side shock. But a negative supply shock only reinforce the Austrians’ main point. Other things equal, such a shock would have raised the equilibrium price level. That would have required an even more massive downward shift in aggregate demand than otherwise to account for the drastic fall in nominal GDP in the early 1920s. Which makes still more telling the economy’s ability to quickly recover without government intervention. Moreover, the fact that the ’21 downturn was one of the few recessions (another being the Great Depression) in which real wages were actually counter-cyclical rather than pro-cyclical suggests that any supply shock was hardly a dominant factor.

    “Kuehn minimizes the extent of Herbert Hoover’s support for government intervention, implying that there was no crucial ideological difference between him and Warren Harding or Calvin Coolidge. But this seems to rest entirely on a reading of the report of Harding’s Conference on Unemployment, which Hoover chaired. As far as I can tell, Kuehn is unfamiliar with the extensive historical literature on Hoover, which emphatically and firmly situates him as the Progressive Republican.

    “On the Harding tax cuts, Kuehn contends that the Revenue Act of 1921, while reducing marginal tax rates considerably, simultaneously shifted tax brackets downward. While this is literally true, the shift did NOT increase the marginal tax rate at any income level. Kuehn relies on an IRS historical table that shows that ‘while the top bracket’s rate was reduced by 15 percentage points from 1921 to 1922 in Harding’s Revenue Act of 1921, the income taxable at that rate was expanded from all income over $1,000,000 to all income over $200,000.’ But the IRS table shows rates solely for the highest and lowest tax brackets, and nothing in between. Prior to the 1921 Act, there were three brackets above $200,000. The highest was reduced from 73 to 58 percent. The lowest, covering incomes between $200,000 and $500,000, was reduced from 68 to 58 percent.

    “Kuehn goes on to report that ‘the percent of individual income collected as revenue through the income tax actually increased’ not only after the first revenue act passed but also from 1923 to 1925. I think this is correct. If so, I can only attribute it to the fact that rising incomes were driving people already paying income taxes (still less than a majority of the working population) into higher tax brackets.”

Viewing 9 posts - 1 through 9 (of 9 total)
  • You must be logged in to reply to this topic.