(p. C3) Beginning in January 1920, something much worse than a recession blighted the world. The U.S. suffered the steepest plunge in wholesale prices in its history (not even eclipsed by the Great Depression), as well as a 31.6% drop in industrial production and a 46.6% fall in the Dow Jones Industrial Average. Unemployment spiked, and corporate profits plunged.
. . .
In the absence of anything resembling government stimulus, a modern economist may wonder how the depression of 1920-21 ever ended. Oddly enough, deflation turned out to be a tonic. Prices–and, critically, wages too–were allowed to fall, and they fell far enough to entice consumers, employers and investors to part with their money. Europeans, noticing that America was on the bargain counter, shipped their gold across the Atlantic, where it swelled the depression-shrunken U.S. money supply. Shares of profitable and well-financed American companies changed hands at giveaway valuations.
Of course, the year-and-a-half depression must have seemed interminable for all who were jobless or destitute. It was, however, a great deal shorter than the 43 months of the Great Depression of 1929-33. Then too, the 1922 recovery would bring tears of envy to today’s central bankers and policy makers: Passenger-car production shot up by 63%, for instance, and the Dow jumped by 21.5%. “From practically all angles,” this newspaper judged in a New Year’s Day 1923 retrospective, “1922 can be recorded as the renaissance of prosperity.”
In 2008, as Lehman Brothers toppled, the Great Depression monopolized the market on historical analogies. To avoid a recurrence of the 1930s, officials declared, the U.S. had to knock down interest rates, manipulate stock prices to go higher, repave the highways and trade in the clunkers.
The forgotten depression teaches a very different lesson. Sometimes the best stimulus is none at all.
For the full commentary, see:
JAMES GRANT. “The Depression Fixed by Doing Nothing; The agonizing but often forgotten 1920-21 economic crisis suggests that sometimes the best stimulus is none at all.” The Wall Street Journal (Sat., Jan. 3, 2015): C3.
(Note: ellipsis added.)
(Note: the online version of the review has the date Jan. 2, 2015, and has the title “The Depression That Was Fixed by Doing Nothing; The often forgotten 1920-21 economic crisis suggests that sometimes the best stimulus is none at all.”)
Grant’s commentary is elaborated on in his book:
Grant, James. The Forgotten Depression: 1921, the Crash That Cured Itself. New York: Simon & Schuster, 2014.