Monday, February 10, 2014

US Wages in 1920–1921

Consider this passage from Rothbard:
“Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in America’s first great depression, 1819, when the federal government’s only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments which periodically permitted insolvent banks to continue in operation without paying their obligations. 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.” (Rothbard 2008: 185–186).
The trouble with this is that the evidence on wages in this period is contradictory.

It seems that the period from 1916 to 1923 was one of unusual wage volatility in the United States, but that was the result of wage increases in the First World War and the subsequent fall that began in 1918 well before the recession of 1920–1921 (Sundstrom 1992: 432–433).

If one looks at real wages from 1920–1922 in the graph below that shows farm wages versus average hourly manufacturing wages (with data from Cole and Ohanian 2000: 190, Table 4), it can be seen that, while farm wages fell significantly, real manufacturing wages actually rose.

So something is wrong with the story Rothbard paints above.

Further Reading
Barkley Rosser, J. “Does the 1920–21 Recession really prove that Laissez Faire saves us from Recessions?,” Econospeak, November 8, 2010

Cole, Harold L. and Lee E. Ohanian. 2000. “Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression,” NBER Macroeconomics Annual 15: 183–227.

Rothbard, Murray Newton. 2008. America’s Great Depression (5th edn.). Ludwig von Mises Institute, Auburn, Ala.

Sundstrom, William A. 1992. “Rigid Wages or Small Equilibrium Adjustments? Evidence from the Contraction of 1893,” Explorations in Economic History 29.4: 430–455.


  1. No, no. I enjoy Rothbard bashing but, unlike Murphy vis a vis Krugman, you need to address his real point. The logic there suggests nominal wages. So what happen to nominal wages?

    1. It is hard to find evidence but Bernard Beaudreau, Making Sense of Smoot-Hawley: Technology and Tariffs, p. 75, table 3.3 gives these figures for nominal manufacturing wages, for what they are worth:

      1920 $0.55

      1921 $0.51

      1922 $0.48

      So it fell 7.27%, which is a rather slight fall.

    2. And of course the trouble is you find contradictory estimates too, as in Daniel's paper “A Critique of Powell, Woods, and Murphy on the 1920–1921 Depression” (The Review of Austrian Economics 24.3 [2011]: 273–291, at pp. 281-283:

      "The NBER index of average weekly earnings across twelve manufacturing industries declined by 34% from June 1920 to its lowest point in January 1922, a considerably steeper drop than the decline of 19% recorded in the BLS’s consumer price index over the same period."

      But "average weekly earnings" could suggest that this sharp drop was more the result of cuts in number of hours worked rather than hourly nominal wage cuts.

    3. Looks like two slight falls. That's a stumble.

  2. History of Wages in the United States from colonial Times to 1828 refutes your allegation that wages rose.;view=1up;seq=535
    Bulletin of the US BUREAU OF LABOR STATISTICS No. 604

  3. So where is the evidence that wage rates were not PERMITTED to fall?

  4. I'll give you an answer the moment you answer this question:

    Is Hayek thinking of a tendency towards supply and demand equilibrium in goods and labour markets by flexible prices and wages, moved by market agents in their transactions, in your Hayek passage?

    Yes or no? No evasions.

    And no violation if the law of non-contradiction (as in some stupid reply like "he is, but at the same time he is not").