Now the recovery began in August 1921 and continued into 1922.
Did the development and strength of that recovery have something to do with this, described by Murray Rothbard?:
“Member bank reserves increased during the 1920s largely in three great surges—one in 1922, one in 1924, and the third in the latter half of 1927. In each of these surges, Federal Reserve purchases of government securities played a leading role. “Open-market” purchases and sales of government securities only emerged as a crucial factor in Federal Reserve monetary control during the 1920s. The process began when the Federal Reserve tripled its stock of government securities from November, 1921, to June, 1922 (its holdings totaling $193 million at the end of October, and $603 million at the end of the following May). It did so not to make money easier and inflate the money supply, these relationships being little understood at the time, but simply in order to add to Federal Reserve earnings. The inflationary result of these purchases came as an unexpected consequence. It was a lesson that was appreciatively learned and used from then on.”52In other words, an unprecedented open market operation by the Federal Reserve appears to have strongly aided the recovery process in late 1921.
52.Yet not wholly unexpected, for we find Governor Strong writing in April, 1922 that one of his major reasons for open-market purchases was “to establish a level of interest rates . . . which would facilitate foreign borrowing in this country . . . and facilitate business improvement.” Benjamin Strong to Under-Secretary of the Treasury S. Parker Gilbert, April 18, 1922. Chandler, Benjamin Strong, Central Banker, pp. 210–11.
(Rothbard 2000: 133).
Strong even said explicitly (as quoted in Rothbard’s footnote) “that one of his major reasons for open-market purchases was ‘to establish a level of interest rates . . . which would facilitate foreign borrowing in this country . . . and facilitate business improvement.’”
Once we see that this policy was combined with Fed cuts to the discount rate during the recession of 1920-1921 we see that it used loose monetary policy to end the recession:
Discount Rate of the Federal Reserve Bank of New YorkAlthough the rate was raised to 7% in June 1920, the rate was cut from 7% in 1921 to 5.5% by July, and a further cut to 5% in September as the recovery had begun, and then to 4.5% in November. This was when the open market purchases began.
Date | Rate
May | 6%
June | 7%
Dec. | 7%
Jan. | 7%
Apr. | 7%
May. | 6.5%
Jun. | 6%
Jul. | 5.5%
Sep. | 5%
Nov. | 4.5%
Jan. | 4.5%
Jun. | 4%.
At this point, I think the whole modern Austrian narrative about 1920–1921 falls apart.
Rothbard, Murray N. 2000. America's Great Depression (5th edn.), Ludwig von Mises Institute, Auburn, Alabama.