The Forgotten Depression: 1921: The Crash that Cured Itself

by James Grant

James Grant’s story of America’s last governmentally untreated A bible for conservative economists, this “carefully researched history…makes difficult economic concepts easy to understand, and it deftly mixes major events with interesting vignettes” (The Wall Street Journal).In 1920–1921, Woodrow Wilson and Warren G. Harding met a deep economic slump by seeming to ignore it, implementing policies that most 21st century economists would call backward. Confronted with plunging prices, wages, and employment, the government balanced the budget and, through the Federal Reserve, raised interest rates. No “stimulus” was administered, and a powerful, job-filled recovery was under way by late 1921. Yet by 1929, the economy spiraled downward as the Hoover administration adopted the policies that Wilson and Harding had declined to put in place. In The Forgotten Depression, James Grant “makes a strong case against federal intervention during economic downturns” (Pittsburgh Tribune Review), arguing that the well-intended White House-led campaign to prop up industrial wages helped turn a bad recession into America’s worst depression. He offers examples like this, and many others, as important strategies we can learn from the earlier depression and apply today and to the future. This is a powerful response to the prevailing notion of how to fight recession, and “Mr. Grant’s history lesson is one that all lawmakers could take to heart” (Washington Times).

Genres: Economics, History, Finance, Politics, Nonfiction, Business, American History

273 pages, Kindle Edition

First published November 11, 2014

About the author

There is more than one author by this name on Goodreads.

James Grant, financial journalist and historian, is the founder and editor of Grant’s Interest Rate Observer, a twice-monthly journal of the investment markets. His book, The Forgotten Depression, 1921: the Crash that Cured Itself, a history of America’s last governmentally unmedicated business-cycle downturn, won the 2015 Hayek Prize of the Manhattan Institute for Policy Research.

Among his other books on finance and financial history are Bernard M. Baruch: The Adventures of a Wall Street Legend (Simon & Schuster, 1983), Money of the Mind (Farrar, Straus & Giroux, 1992), Minding Mr. Market (Farrar, Straus, 1993), The Trouble with Prosperity (Times Books, 1996), and Mr. Market Miscalculates (Axios Press, 2008).

Reviews

[Patrick Peterson · Rating 4 out of 5]

Liked it, did not love it.
Lots of promise, lots of good details, but not quite what I was hoping for.
Here is my review: http://libertyunbound.com/node/1476

But the working link now (2021-12-13) seems to be: https://web.archive.org/web/201511020...

[Naomi Young · Rating 3 out of 5]

This book can, I guess, count toward my resolution to read some more substantial works this year. But I can't say that I remember enough of my high school Economics class, nor yet the technical information from my Business Reference class, to critique the argument Grant puts forward that The Invisible Hand of the Market will right all things if in no way restricted.

However, I did enjoy some of the extremely forceful language and disputation by the political figures in this book. We talk about the incivility of the current government, but in fact I can't remember the last time there was a flat-out assault at a Congressional hearing, do you? One is reported here.

A nice slice of US history between the World War and the Roaring Twenties that isn't much discussed in history books, probably because it's a very thin slice. But a significant one, apparently.

[Fredrick Danysh · Rating 3 out of 5]

Following World War I and before the Roaring 20s and the Great Depression of 1929 there was a smaller depression that corrected itself. The Forgotten Depression looks into the cause, effects of, and results of this fairly forgotten period of economic decline. An informative history read.

[Walt · Rating 3 out of 5]

A very thorough treatment of how the Federal Reserve got started. Includes some interesting history behind Wilson, Harding & Coolidge. The biggest takeaway is that the economy pretty much corrected itself without much government intervention - which supports the belief that the Great Depression would have ended earlier without FDRs multiple levels of interference.

[Fred Kohn · Rating 3 out of 5]

In a back cover endorsement, Richard Norton Smith writes, "You don't have to agree with Grant's economics to admire the rigor of his thought, the grace of his prose, or the sweep of his argument …" This is all exactly right. I certainly don't agree with Grant's economics. If this were the only book you were to read on the period, you would come away thinking Warren G. Harding was one of our greatest Presidents and the only thing Woodrow Wilson did right was to have a stroke. Nevertheless, the book was well written, and you will get facts that you won't find in the histories written by more orthodox economists.

[Mike · Rating 5 out of 5]

Jim Grant takes the position that the 1921 U.S. Depression was short-lived primarily because leaders at the relatively new Federal Reserve, and most political leaders of the day, were committed to fiscal rectitude and non-intervention in the economy. He does so in a very well organized and well written book that is filled with quotes and citations to primary sources such as meeting notes, speeches, correspondence and editorials. Though the book is very readable, it helps if the reader has some understanding of banking and current-day monetary policy.

[Dave Ermer · Rating 5 out of 5]

Brilliant. I read this book after reading a review in the WSJ and a Robert Samuelson column. It is 180 degrees opposite from the Keynesian macroeconomics that I learned in college, and a lot of it makes sense when you place it in the context of the Great Recession. It's not a long book. Read it.

[Breakingviews · Rating 4 out of 5]

By Edward Chancellor

“The central irony of financial crisis is that while it is caused by too much confidence, too much lending and too much spending, it can only be resolved with more confidence, more lending and more spending.” This post-crisis advice from Larry Summers - a former U.S. Treasury secretary, presidential economic advisor and president of Harvard - represents the conventional wisdom of the economic policymaking elite. This is the same elite, you may recall, that failed to see the global meltdown coming in the first place. Could it be that they’ve got things wrong yet again?

James Grant, an experienced chronicler of Wall Street’s deeds and misdeeds past and present, believes so. In his latest book, “The Forgotten Depression” - subtitled “1921: The Crash that Cured Itself” - Grant relates the story of the U.S. economic boom which appeared after the Great War ended and the very severe bust that followed in its wake. The 1921 downturn was not softened by fiscal or monetary policy. It was, in Grant’s words, “America’s last governmentally unmedicated depression.” And if most people have forgotten this depression, as the book’s title suggests, it’s because the downturn was brief and any lingering, grim memories were soon effaced by the economic high of the Roaring Twenties.

In its general characteristics, the frenzied post-war prosperity resembles many more recent booms. It was marked by rising leverage in the banking system; incautious lending to emerging markets - National City Bank, the corporate forebear of today’s Citigroup, lost money lending to Cuban sugar planters; a growing taste for high living - the comptroller of the Currency announced at a Federal Reserve Board meeting that he was “very much disgusted” to discover that his chauffeur had acquired three silks shirts; and widespread business profligacy. Alfred Sloan, who later headed General Motors to great acclaim, recalled this era as a time when “overruns on capital investment had become the rule.” Some of the Detroit carmaker’s money was spent on constructing the world’s largest office building.

While the features of this boom may be familiar to us, the economic downturn, which commenced in early 1920, belongs to a different age. For a start, it was savage in its intensity. National income fell, in nominal terms, by nearly a quarter. The stock market was sawed in half, while corporate profits sunk by more than 90 percent. At the high estimate, nearly one in five eligible workers was unemployed. Deflation, the economic bogeyman of our time, clocked in at 15 percent. The Kansas City haberdashery store of future President Harry Truman was one among thousands of business failures.

Even stranger to comprehend was the response of the authorities to this economic catastrophe. As unemployment soared, the Fed hiked interest rates up to 7 percent and kept them there. Factoring in the general decline in the price levels, real rates topped 20 percent. Deflation was embraced. “Where there has been inflation,” opined Adolph Miller, a Berkeley professor and the only economist on the board of the Fed, “there must follow deflation, as a necessary condition to the restoration of economic health.” The Fed chief, William Harding, resisted calls for extraordinary monetary experiments, “especially if those new plans and methods are fundamentally unsound.”

Nor did the newly installed administration of Warren Harding (no relation to the Fed’s Harding) apply Larry Summers’ advice. Rather, Treasury secretary Andrew Mellon slashed government borrowing and spending. President Harding even rejected a Senate-sponsored veterans’ bonus bill. Throughout the downturn, the federal government maintained a large surplus. “There is no instant step from disorder to order,” the Republican president observed in his inaugural address. “We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization.” An old lesson perhaps, but one no longer apparently taught at Harvard, or observed in practice in Washington.

America’s business leaders responded to the economic contraction by slashing inventories and paying down debts. The president of a leading truck maker told his stockholders that the downturn “afforded an opportunity to put into effect many of the economies of manufacture and selling, the importance of which had long been appreciated but the adoption of which had been precluded by the necessities of peak production.” To bring costs down in line with revenues, wages were slashed. By August 1921, the Wisconsin Steel Works of the International Harvester Group had cut workers’ pay by a total of 44 percent.

Throughout the depression, the American dollar remained convertible into gold. By the summer of 1921, the worst was over. Grant notes that “inventories were low, gold was plentiful, and asset values were cheap.” The economic recovery which started around that time was as abrupt as the preceding decline. Corporate America fortified by its recent cold bath emerged in rude health. In 1922, manufacturing output per person rose by 20 percent - the largest ever recorded increase. Strong productivity gains continued throughout the Roaring Twenties.

“The Forgotten Depression” is a loving tribute to laissez-faire, a “history of instructive inaction” in the author’s words. Grant pens his tale with a wry humor reminiscent of John Kenneth Galbraith in “The Great Crash.” Whereas Galbraith belonged to the Keynesian fold, Grant is more sympathetic to the Austrian school of Friedrich Hayek and economic historian Murray Rothbard. Grant repeats Rothbard’s claim that what distinguished the Great Depression from the brief economic contraction of 1921 was the “whirlwind of intervention” from President Herbert Hoover, in particular his successful attempt to prevent wages from falling in the face of deflation. The price mechanism, writes Grant, worked more freely in 1920 to 1921 than it was allowed to do in 1929 to 1933.

The global financial crisis of 2008 has been followed by even more intervention from policymakers than Hoover mustered. Summers’ prescription of “more spending and more lending” has been adhered to around the globe. Yet six years after the collapse of Lehman Brothers, the economies of the developed nations remain weak and productivity growth has been almost non-existent. “The Forgotten Depression” is a timely reminder that our forebears knew of other, more efficacious, remedies to cure financial hangovers than the hair of the dog.

[Russ Lemley · Rating 4 out of 5]

Jim Grant's The Forgotten Depression is a well-written history of American economic history from 1921 to 1922. The reason this history is important is because the American economy was able to quicky recover from an economic depression. Grant argues that the economy recovered so well because neither fiscal nor monetary policy were implemented to "help." Rather, business reduced costs, and prices of their goods, in response to a significant downturn in economic activity. In fact, it was these very adjustments that helped the economy turn into a more sustainable path of growth. If one compares the 1921 depression to the one that began in 1929, which served as the justification for large governmental involvement in the economy, the differences between the two recoveries are severe and obvious.

I recommend this book to anyone interested in American history in general and economic history in particular.

[John McDonald · Rating 3 out of 5]

James Grant has a point of view that economies should remain free to regulate themselves and this work is an attempt to prove that. He does not make a convincing case, however, seeming to rely on a
theory of deflationary pricing and concurrent wage reduction, an economic dynamic economists then and now discredit as a workable cure for economic downturns. All one really must do is think for a while about the effects deflation has on asset values, which in turn affect values assigned to collateral as well as personal and company assets. Grant, a perspicacious and seasoned student of interest rate movements, gives credit where it may not be warranted because he has an ideological preference or bias.

The book, nevertheless, is worthwhile for its historic notes in a time that preceded by almost a decade the collapse of both stocks and credit. One detects in his views distaste for central banking, i.e. the Federal Reserve, but there is no going back here. Markets often fail, and remediation comes not quickly enough since repair, without intervention, takes longer than society and people can allow. Grant knows this,of course, but his biases to the contrary are not corrected here.

[Duane Heeringa · Rating 2 out of 5]

Interesting perspective - Grant is quite the hard money libertarian. I found myself asking whether the upheaval of the early 20th century (WWI, Bolshevik revolution) would justify the course of action that was taken. I mean, if everything was working so well prior to the floating money standard, why did people want to change?

[Matt · Rating 2 out of 5]

Good knowledge inside, but lord was that boring

[Mike · Rating 2 out of 5]

The author is dead-set on his thesis that we need to basically abolish the fed and go back to the gold standard. While the book covers in great detail all the minutia of who was talking with who, it misses key information and glosses over huge data points that are contra to his thesis.

For example, he mentions that during the Great Recession, GDP dropped by around 2%, which if you adjust for back then, really is more like 4% (what?). Meanwhile, according to him, the GDP drop of 9% during the forgotten depression is likely overestimated, although nobody really knows what the real number is since this was before nationwide statistics were reliable. Um... What? Can you go into detail on that? That seems to disprove your entire thesis.

What happens to that lost productivity? Let's think in terms of people here. Imagine 9% of people sit around and do nothing for a year. That productivity doesn't ever come back. That productivity represents wealth that never is created. People don't just work 109% as hard the next year. That is a very real loss to society.

There also seem to be glaring huge holes in his narrative. For example, if all the unemployed starved and died, then unemployment would resolve itself (my sarcasm). But he spends 0 time discussing the human impacts of this depression. Did we 'bounce back' because people ate nothing but potatoes for a year?

Then, there's the simple fact that a nationwide bankruptcy of a megacorporation is not something that could easily be resolved like the bankruptcy of 1000 mom-and-pop stores. These corporations have huge assets that cannot simply be transferred or sold off.

These are just some of the money huge differences between now and then. Here's some others: we have unemployment insurance, medical coverage for uninsured, etc... that simply did not exist back then. Also, a third of the population is not of working age, life expectancy was 54 years old, this means that virtually everyone could work, which would guarantee at least some income. Land was also far less constrained than it is today, you know, with it's 90 million people vs today's 325 million, so you probably could just camp out somewhere rather than pay for a place.

Today, if government can spend $500B to prop up zombie corporations, and in doing so, delay their demise, they can also collect taxes from all that employment and avoid paying out unemployment benefits/other benefits. It could be the case that by preventing the bankruptcy of all these large employers, they could spend $500B and get $1T back. This is a key difference - back then the government was only on one side of the equation since they did not pay out benefits - today they are on both sides.

Finally, the elephant in the room: let's say we go back to the gold standard like he seems to think is the least imperfect monetary system. How do we go from 0 gold in Fort Knox to enough to back the entire economy? I'll give a clue: historically it comes from either appealing to citizens patriotism to hand over their gold to the government, or forcibly confiscating it (done under Roosevelt when Fort Knox was running low on gold, also done in Taiwan when the nationalist Chinese government moved there, and many other places prior to fiat money's popularity).

Does he suggest confiscation is a good thing? Also, what happens when we suddenly discover a huge new source of gold and gold supplies increase dramatically like was the case with Silver? What if we can mine an asteroid for 10X the gold that exists on earth? Do our dollars just go down in value 90% overnight?

Finally, there is some interesting math involved with gold. At one point, the US held 75% of the world's gold. There simply was not enough gold in existence to back more dollars, so as the economy grew, gold would deflate the currency, not to mention, you know, the other 95% of the world population that is not from the US.

There have been 200 tonnes of gold mined in human history. Let's say all of it magically poofs into government coffers all over the world. World M1 money supply is $40T. So that's what, $5.6M per ounce? Gold costs what, ~$2000/ounce now? Do we really think this is practical? All commercial, personal, and industrial uses of gold would instantly become non-viable. If the governments could only recover half that gold to back M1 money, then the 'value' would be double, or $11.2M/ounce. Everyone would become a gold miner overnight as that would be the most profitable profession by far. What real 'wealth' is created by having half the world mine for a yellow metal? In the big picture, it gold is unimportant to human quality of life, and every person mining it would be a waste of resources that could be spent on other things.

Yeah... this book is nonsense masquerading as intellectual thought.

[Bchara · Rating 3 out of 5]

I found this book hard to read. The main idea is that the free market itself regulated the depression. But the author should have focused his main points more - why did this depression happen, what was Wilson’s policy, the impact of the interest rates policy, etc. I think this book swings between a narration and an essay. Maybe if the author opted for a more didactic approach, things would have been clearer for people who are not accomplished economists, because the main points get drowned through the narration. That said, putting into light this depression is refreshing since it shows that free market is not the big evil that is portrayed today and has serious sound arguments behind it and not just that but it proved successful at least once.

[Russell DeLong · Rating 3 out of 5]

It's very difficult to evaluate this book, given how predisposed the author is to his conclusions, the fact that he concedes his view is not the mainstream one, and given how few materials have been written specifically on this topic relative to the Great Depression.

He makes a well-researched case, but I'm not satisfied with his account of arguments against him. I'd want someone else qualified in this field to review it and speak to why other economics would downplay the significance of this recession/depression.

[Dan Zwirn · Rating 5 out of 5]

A readable account of the damage wrought by the US government’s first disastrous intrusion into the marketplace under Wilson (hidden and conflated by the powers the government asserted for itself during World War I) and the principled steps the Harding administration took that permitted the markets to self-correct and that set the stage for the 1920s boom.

Needless to say, much can be applied to the current declining economy under the yolk of the current government’s disastrous fiscal policy.

[Jagordo · Rating 3 out of 5]

Feels disjointed. I got the sense that Grant couldn't decide on a proper mix of narrative, theory, and stats. As a result, some chunks show Grant's gift as a writer and thinker — he's clever, fun, and informative all in one. Other times, you're dragging through it. Don't get me wrong, the reasoning is sound and I believe his conclusions are correct, but it isn't as half as enjoyable as his other work.
This is definitely a book worth getting if you're interested in economic history, but it's not one you'll likely be entertained by.

[Kyle · Rating 3 out of 5]

Grant provided evidence including quotes of officials from conferences, articles describing the situation, and economic and industry statistics. I believe he has sufficient evidence to support his overall conclusion.

Although, it was a bit of a dry read. I wouldn't recommend unless you enjoy business history, because not even economics is a good classification because it doesn't talk much about economic theory.

[Mark Pasquini · Rating 5 out of 5]

How an economic downturn should be handled. Drop taxes, cut gov't spending and the Fed sitting on its hands. A depression with inflation and deflation being cured in 18 months. No Keynes and heavy-handed government interference. What would have happened if the progressives Hoover and FDR had followed this blueprint, we will never know, but it would be interesting and, possibly, far less tragic. Recommended.

[Connor Fitzpatrick · Rating 4 out of 5]

This book did it's job. It did a good job of laying out the 1921 depression and how the major players of the day reacted. At the end of the book it juxtaposed the crash and following depression of a year later and how the reaction of government made it worse. I'm giving it 4 stars because it did it's job and it was engaging enough to keep me interested, but not that interested. I'm not sure if it's the fault of the writer or just that it is near impossible to make a topic like this exciting.

[Joseph Calce · Rating 3 out of 5]

Grant has a lot of interesting historical tidbits on the early stages of the Fed, U.S. Presidents, and the inner workings of the Treasury Department.

The book wasn't cohesive. It jumped around from industry to industry, from presidential administration to administration, and from year to year. It was often difficult to follow.

Grant's writing was interesting enough to convince me to read some of his other works, though.

[James · Rating 4 out of 5]

Great read!

[Alex Xu · Rating 4 out of 5]

讲了1920年的通缩小周期。挺有意思的。

[David · Rating 1 out of 5]

Could’ve been a (probably still boring, unconvincing, and painfully tedious ) email

[Jacob]

Read for class

[Jonathan Waite · Rating 2 out of 5]

More like 2.5 stars - I kind of liked the book for its historical value in highlighting a depression rarely discussed or highlighted (at least to the degree of the Great Depression). The crux of his thesis seems to be a laissez-faire economic policy during rough economic times and that letting prices deflate and naturally take their course will help the economy recover. I guess my simple view is that theory probably wouldn't work in reality due to the sheer size of our credit books (both govt and from consumer/personal standpoint) -- the banks would be the real winner under that scenario as their asset values (i.e. their loans) would maintain their price integrity and our ability to repay would be greatly diminished. Just a thought -- but I liked the historical retelling of this period from an economic standpoint. Jim Grant's Interest Rate Observer is a great newsletter and I read it whenever I get a chance.

[Stephen P · Rating 4 out of 5]

I would have given this book 5 Stars for the history of the 1920-21 economic depression. However, in the preface the author makes the case that if the same government monetary and fiscal policies were implemented for the 2008 Great Recession, the economic recovery would have been faster and more robust. Unfortunately, his arguments seemed very simplistic and not fully thought through. To follow this thought would require changing to major historical events: 1) a return to the gold standard and 2) eliminate the legislated dual mandate of the Fed. The author only attempts to follow-up on his premise in the last chapter and the epilogue and never really addresses the possible implications of these major changes.

If you are interested in the events of the 1920-21 depression, this is a very interesting read. If you are looking for a case study and thoughtful proposals on fiscal and monetary policy, this book is lacking. Reader be advised.

[Kbullock · Rating 4 out of 5]

The author makes a convincing case that the economic downturn of 1920-21 was a severe depression, contrary to the arguments of some contemporary Keynesian economists. Once that question is settled, the Keynesians have a big problem, because it's undisputed that the American economy recovered briskly in 1922, despite the complete absence of government intervention. The author devotes some ink to related arguments: the gold standard was superior to central bank management, and Herbert Hoover prevented the economy from recovering from the 1930 downturn. Unfortunately, the book is not nearly long enough for the author to make a completely persuasive argument on those topics.

His writing style is quirky, and his habit of putting information into footnotes on every other page is annoying. Still, it's a worthwhile read, and not very long.

[Alicia Melvin · Rating 5 out of 5]

Vital reading for the current crisis

Grant’s description of a V shaped
Depression that cured itself so fast that it never imprinted on the popular culture is must reading for the mess we are now in. We can recover quickly through free enterprize or we can get bogged
Down in government subsidized and controlled misery. Grant offers hope for fast recovery.

[thomas b cahill · Rating 5 out of 5]

The forgotten depression

I will probably never attend a Grant fall conference , much to my chagrin. But I really enjoyed this well researched, scholarly but
entertaining book . His ideas on the gold standard deserve renewed interest . James Grant is a gentleman , a rare treasure in our divided culture.And his wife is a physician !
Thomas Cahill MD