Saturday, October 6, 2012

Rothbard on the Recession of 1920–1921

I maintain that the Austrians can’t get their story straight on the recession of 1920–1921.

A look through some passages from Rothbard’s America's Great Depression (2000) confirms this.

Let us review the passages:
“As early as 1915 and 1916, various Board Governors had urged banks to discount from the Federal Reserve and extend credit, and Comptroller John Skelton Williams urged farmers to borrow and hold their crops for a higher price. This policy was continued in full force after the war. The inflation of the 1920s began, in fact, with an announcement by the Federal Reserve Board (FRB) in July, 1921, that it would extend further credits for harvesting and marketing in whatever amounts were legitimately required. And, beginning in 1921, Secretary of Treasury Andrew Mellon was privately urging the Fed that business be stimulated, and discount rates reduced.” (Rothbard 2000: 121).

“If the Reserve authorities had been innocent of the consequences of their inflationary policy in 1922, they were not innocent of intent. For there is every evidence that the inflationary result was most welcome to the Federal Reserve. Inflation seemed justified as a means of promoting recovery from the 1920–1921 slump, to increase production and relieve unemployment.” (Rothbard 2000: 134).

“The first inflationary spurt, in late 1921 and early 1922—the beginning of the boom—was led ... by Federal Reserve purchases of government securities. Premeditated or not, the effect was welcome. Inflation was promoted by a desire to speed recovery from the 1920–1921 recession. In July, 1921, the Federal Reserve announced that it would extend further credits for harvesting and agricultural marketing, up to whatever amounts were legitimately required. Soon, Secretary Mellon was privately proposing that business be further stimulated by cheap money” (Rothbard 2000: 137–138).

“... The 1921–1922 inflation, in sum, was promoted in order to relieve the recession, stimulate production and business activity, and aid the farmers and the foreign loan market.” (Rothbard 2000: 137–138).
So, according to Rothbard, the Federal Reserve initiated an inflationary policy already in 1921, so how can the recovery in that year to ascribed to laissez faire and non intervention?

On pp. 121–122, Rothbard briefly mentions the War Finance Corporation (which existed from 1918–1939). We also read in a footnote:
“The War Finance Corporation had been dominant until 1921, when Congress expanded its authorized lending power and reorganized it to grant capital loans to farm cooperatives. In addition, the Federal Land Bank system, set up in 1916 to make mortgage loans to farm associations, resumed lending, and more Treasury funds for capital were authorized.” (Rothbard 2000: 122, n. 25)
Here is some background on the War Finance Corporation:
“Originally created as a war agency, as its name implies, the War Finance Corporation was empowered by the Conpress in March, 1919, to assist in the task of reconstruction and readjustment. It was authorized, in order to promote commerce with foreign nations through the extension of credits, and to aid in the transition from the conditions of war to the conditions of peace, to make advances not exceeding $1,000,000,000 to American exporters and American banking institutions for the purpose of financing the exportation of domestic products. This authority was exercised until May, 1920, when the activìties of the Corporation were suspended.

In the autumn of 1920, when the collapse in commodity markets became acute, the question of our exports again became a matter of general interest; and the Congress, in January, 1921, adopted the following joint resolution directing that the activities of the Corporation be resumed:

‘That the Secretary of the Treasury and the members of the War Finance Corporation are hereby directed to revive the activities of the War Finance Corporation, and that said Corporation be at once rehabilitated with the view of assisting in the financing of the exportation of agricultural and other products to foreign countries.’” (Wright 1922: 292)
This War Finance Corporation made emergency loans to farmers in 1921 (Walton and Rockoff 2005: 405), and the volume of loans made in 1921 was $112 million. In August 1921, the corporation became a rediscount agency for agricultural and livestock producers.

So here we have a US government corporation extending credit to favoured businesses, allegedly distorting markets, but still the Austrians regard 1920–1921 as a laissez faire recovery.

This is reinforced by this statement of Rothbard:
“While the government did not greatly intervene in the 1920–1921 recession, there were enough ominous seeds of the later New Deal. In December, 1920, the War Finance Corporation was revived as an aid to farm exports, and a $100 million Foreign Trade Financial Corporation was established. Farm agitation against short-selling led to the Capper Grain Futures Act, in August, 1921, regulating trading on the grain exchanges. Furthermore, on the state level, New York passed rent laws, restricting the eviction rights of landlords; Kansas created an Industrial Court regulating all key industries as ‘public utilities’; and the Non-Partisan League conducted socialistic experiments in North Dakota.

Perhaps the most important development of all, however, was the President’s Conference on Unemployment, called by Harding at the instigation of the indefatigable Herbert Hoover. This was probably the most fateful omen of anti-depression policies to come. About 300 eminent men in industry, banking, and labor were called together in September, 1921, to discuss the problem of unemployment. President Harding’s address to the conference was filled with great good sense and was almost the swan song of the Old Order’s way of dealing with depressions. Harding declared that liquidation was inevitable and attacked governmental planning and any suggestion of Treasury relief. He said, ‘The excess rather than a source of cure.’

To the conference members, it was clear that Harding’s words were mere stumbling blocks to the wheels of progress, and they were quickly disregarded. The conferees obviously preferred Hoover’s opening speech, to the effect that the era of passivity was now over; in contrast to previous depressions, Hoover was convinced, the government must ‘do something.’ The conference’s aim was to promulgate the idea that government should be responsible for curing depressions, even if the sponsors had no clear idea of the specific things that government should do. The important steps, in the view of the dominant leaders, were to urge the necessity of government planning to combat depressions and to bolster the idea of public works as a depression remedy. The conference very strongly and repeatedly praised the expansion of public works in a depression and urged coordinated plans by all levels of government. Not to be outdone by the new administration, former President Wilson, in December, added his call for a federal public works stabilization program.

The extreme public works agitators were disappointed that the conference did not go far enough. For example, the economist William Leiserson had thought that a Federal Labor Reserve Board ‘would do for the labor market what the Federal Reserve Board did for the banking interests.’ But the wiser heads saw that they had made a great gain. As a direct result of Hoover’s conference, twice as many municipal bonds for public works were floated in 1921 and 1922 as in any previous year; Federal highway grants in-aid to the states totaled $75 million in the autumn of 1921, and American opinion was aroused on the entire subject. (Rothbard 2000: 191–193).
So all in all the measures taken in 1921 included the following:
(1) loose monetary policy including discount rate cuts by the Fed;

(2) open market operations in late 1921–1922;

(3) direct credit allocation by the government War Finance Corporation from early 1921;

(4) some limited deficit financed public works.

Rothbard, Murray N. 2000. America’s Great Depression (5th edn.), Ludwig von Mises Institute, Auburn, Alabama.

Walton, Gary M. and Hugh Rockoff. 2005. History of the American Economy (10th edn.). Thomson/South-Western, Mason, Ohio.

Wright, Ivan. 1922. Bank Credit and Agriculture. McGraw-Hill Book Co., Inc., New York.


  1. I recall a quote from someone who said Rothbard admitted to them the 1920-21 depression was primarily monetary.

    That's all I can give you, though. Not sure who it was/whether it's accurate.

  2. I found a quote from the book where Rothbard has this to say:
    "In the 1920–1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced. And this depression was over in one year—in what Dr. Benjamin M. Anderson has called “our last natural recovery to full employment.”
    So I guess he recognized the greater intervention but didn't consider it high enough to ascribe the recovery to it.

  3. I have thought a lot about this, and I'll address it more when I make my blog post on the Recession of 1920 (huge thanks to you Lord Keynes for all the great info of course) and this is what I think the Austrians believe about interest rates and this recession, but don't say.

    I think Austrians believe the hike in int rates helped to liquidate the crisis even faster.

    In America's Great Depression Rothbard says what government should do is slash taxes, spending and encourage credit contraction. This last part gets me, and I never see it discussed, just the first two aspects which you and Kuehn have shown to be totally false.

    Credit contraction was a positive in Rothbard's eyes, and we know Austrians wanted all the "rottenness" to be purged out a la Mellon.
    So I think the hike in int rates, which clearly worsened the recession, was a positive for Rothbard because it helped speed up the crash, to thus speed up recovery.

    Of course this is like treating a cold by bloodletting. Post WWII proved that if left alone, war inflation will work itself out, thus making the whole 1920 recession meaningless.