Thursday, March 12, 2015

Did Austrian Libertarians Read The Forgotten Depression: 1921: The Crash That Cured Itself Properly?

The libertarian blogosphere has been spruiking a recent book by James Grant called The Forgotten Depression: 1921: The Crash That Cured Itself (2014) for some time now.

Right now libertarian blogs are gushing over how the book has won the Hayek Prize of the Manhattan Institute. Well, it is not surprising that the conservative/libertarian Manhattan Institute gave a prize named after Hayek to the book, and, quite frankly, I couldn’t care less.

But what does interest me is this: have the Austrians who are spruiking Grant’s book actually read it properly?

The Austrian libertarians are adamant that US monetary policy did not play a significant role in the recovery from this 1920–1921 recession, which lasted from January 1920 to July 1921. (That, incidentally, was a period of 18 months, which is not particularly short as compared with the average length of recessions in the post-WWII era.)

But right on p. 179 of Grant’s The Forgotten Depression: 1921: The Crash That Cured Itself, there is this statement:
“Public policy made one signal contribution, at least, to the improvement in American finances. This was in the all important matter of interest rates. It was welcome news when the Federal Reserve Bank of Boston cut its main discount rate to 6 percent from 7 percent, effective April 15. It was the first easing move by any Federal Reserve bank since the previous spring. The Federal Reserve Bank of New York followed on May 4 with a reduction to 6.5 percent from 7 percent. This move the market correctly interpreted as the beginning of the end of the era of ultrahigh interest rates (high enough in nominal terms, extra lofty when adjusted for the declines in prices and wages).” (Grant 2014: 179).
Although Grant points to the inflow of gold as a more important factor (in his view) for the recovery in the passage that follows this (Grant 2014: 179–180), he clearly does acknowledge the role of Federal Reserve monetary policy too.

The key element in monetary policy in 1921 was interest rates, and there was a clear sea-change in Federal Reserve rate policy from May 1921 before the start of the recovery in July 1921, when in May they signalled that the high rate policy had ended and began to lower rates. The rate cuts beginning in May 1921 had a great influence on the economy by way of expectations and business confidence – especially by helping to create confidence and expectations of continuing rate cuts and looser monetary policy in the future, as indeed did happen.

Even Grant seems to admit this. But Austrians still deny it – at the same time they point to the book as if it vindicates their views. Let’s see: what would be an appropriate expression for this?… Hoist with your own petard, perhaps?

Anyway, if you want an analysis of the recession of 1920–1921 free from Austrian mythology and ignorance, I refer you to my posts on the subject below:
“The US Recession of 1920–1921: Some Austrian Myths,” October 23, 2010.

“There was no US Recovery in 1921 under Austrian Trade Cycle Theory!,” June 25, 2011.

“The Depression of 1920–1921: An Austrian Myth,” December 9, 2011.

“A Video on the US Recession of 1920-1921: Debunking the Libertarian Narrative,” February 5, 2012.

“The Recovery from the US Recession of 1920–1921 and Open Market Operations,” October 4, 2012.

“Rothbard on the Recession of 1920–1921,” October 6, 2012.

“The Recession of 1920–1921 versus the Depression of 1929–1933,” February 2, 2014.

“Debt Deflation: 1920–1921 versus 1929–1933,” February 3, 2014.

“US Wages in 1920–1921,” February 10, 2014.

“The Causes of the Recession of 1920–1921,” February 11, 2014.

“The ‘Depression’ of 1920–1921: The Libertarian Myth that Won’t Die,” October 31, 2014.

“US Monetary Policy and the Recession of 1920–1921,” December 5, 2014.
Grant, James. 2014. The Forgotten Depression: 1921: The Crash That Cured Itself. Simon & Schuster, New York and London.


  1. Not only recovery, also inflation! inflation that was one of the motive to Genoa Conference, and

  2. ... And the disaster of the return to gold,