Interesting column by James Grant on the short but severe post-WWI Depression of 1920-21:
Our Great Recession ended 2½ years ago, according to the official cyclical timekeepers, but you wouldn’t know it by a glance at the news. Zero percent interest rates and $1 trillion in “stimulus” notwithstanding, the U.S. economy can hardly seem to heave itself out of bed in the morning. Now compare this with the first full year of recovery from the ugly depression of 1920-21. In 1922, under the unsung stewardship of the president best remembered for his underlings’ scandals and his own early death in office, the unemployment rate fell from 15.6 percent to 9 percent (on its way to 3.2 percent in 1923), while constant-dollar output leapt by 16 percent. After which the 1920s proverbially roared.
And how did the administration of Warren G. Harding, in conjunction with the Federal Reserve, produce these astonishing results? Why, by raising interest rates, reducing the public debt and balancing the federal budget. Let 21st-century economists rub their eyes in disbelief. Eighteen months after the depression started, it ended.
I’ve been fascinated by the contrast of Harding’s response to the 1920 depression versus Roosevelt’s seemingly-counterproductive response to the Great Depression since I read several discussions a few years back (see here, here, and here). The problem with macroeconomics, of course, is the paucity of data points and the inability to control for relevant variables. But it is nevertheless striking to me that discussion always seems to focus on what at first glance appears to be the failed Hoover-Roosevelt response to the Great Depression rather than the apparently effective Harding response to the 1920 Depression.
The only discussions I’ve seen of the 1920 Depression are those that support Harding. Has anyone written a good response to that story, because what I’ve read seems fairly compelling (at least to the extent that macroeconomics can ever tell a compelling story).
byomtov says:
You haven’t been looking very hard, perhaps understandably so. Five seconds on Google brings up this.
January 22, 2012, 3:13 pmsteve s says:
The recovery from the 1920 recession, and the others that followed immediately after, note the lack of a sustained recovery, often depend upon the work of Woods if you want to take the view of no govt intervention. These links to Angry Bear explain the recovery in more detail. (These were written back when Beck was talking about the 1920 recovery.)
http://www.angrybearblog.com/2010/04/1920s-depression-glenn-beck-thomas.html
http://www.angrybearblog.com/2010/04/1920s-depression-glenn-beck-thomas_19.html
Steve
January 22, 2012, 3:15 pmCalderon says:
Link to Grant’s column please?
January 22, 2012, 3:15 pmSeamus says:
Here.
January 22, 2012, 3:29 pmRyan says:
I second Steve S.’s suggesting about reading Tom Woods. See, e.g., here and here.
January 22, 2012, 3:41 pmSteve Horwitz says:
Todd,
A recent issue of the Review of Austrian Economics has a piece by Daniel Keuhn looking at that recession in which he was critical of the Austrian take on it. I think he did a decent job of raising some important issues.
January 22, 2012, 3:50 pmJasonRabbit75 says:
SSRN points to Daniel Peter Kuehn’s “A Critique of the Austrian School Interpretation of the 1920-21 Depression”:
January 22, 2012, 3:58 pmhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1591030
anon says:
I wonder if Professor Zywicki found that column and dismissed it since it’s dated April 1?
January 22, 2012, 4:09 pmNateB says:
I haven’t read the article, but this might be an example of what you’re looking for: http://www.springerlink.com/content/5683j4v650187261/
I found it via Wikipedia: http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321#Interpretations_of_the_end
January 22, 2012, 4:26 pmKazinski says:
I think that lowering the public debt is certainly called for. But raising interest rates too much might be counterproductive. I don’t think the economy in 1920 was near as dependent on consumer spending as we are now.
January 22, 2012, 4:35 pmdearieme says:
“When he wasn’t presiding over a macroeconomic miracle cure, Harding convened a world disarmament conference and overhauled the creaky machinery of federal budget-making. For his trouble, historians customarily place him last, or next to last, in their rankings of U.S. presidents.” I trust lawyers would rate him highly for releasing Wilson’s political prisoners?
January 22, 2012, 4:39 pmfrankcross says:
Economic history is a lot more than looking at numbers, as the angrybear post illustrates. And since the Roosevelt actions apparently cut the unemployment rate in half, I’m not sure how they were seemingly counterproductive.
January 22, 2012, 4:42 pmChris Rhodes says:
If low unemployment were the same as a strong economy, this would be a valid argument.
The current government could reduce unemployment to 0% tomorrow by raising taxes and using that money to hire people to dig holes and fill them back in, but I trust you can see the problem with that scenario.
January 22, 2012, 4:54 pmHarry Eagar says:
The ’21 depression wasn’t short for the two-fifths of Americans who lived by agriculture. They were treated to laisser-faire and remained depressed until ’40.
It wouldn’t have been so long but the Republicans did everything to prevent the New deal from dealing with it.
Professor Zywicki, I have to say that I have never read anything by you on economics that makes any sense to me, but you’re asking, so maybe you’re educable. Read Tugwell.
January 22, 2012, 4:57 pmAdrian says:
Daniel Kuehn has written a response, just google “Daniel Kuehn 1920″.
January 22, 2012, 5:00 pmDilan Esper says:
There’s a lot of post hoc ergo propter hoc when it comes to all these depression fiscal policy stories.
January 22, 2012, 5:08 pmClark says:
Upton Sinclair had something to say about it.
January 22, 2012, 5:44 pmbyomtov says:
Chris Rhodes,
In the years 1934-37 the real GDP rose at annual rate of 9.4%. Strong enough for you and Zywicki? It was only when FDR decided it was time to balance the budget that the economy sank again. (And, unsurprisingly, unemployment rose sharply).
January 22, 2012, 5:47 pmGrover Gardner says:
A commenter to the Grant piece helpfully provides this link:
http://cje.oxfordjournals.org/content/36/1/155.full.
January 22, 2012, 5:56 pmbyomtov says:
Steve S.,
Thanks for the links to Angry Bear. Maybe TZ Should read those pieces before he relies on people like Woods again.
The Von Mises Institute? I thought even libertarians thought they were crackpots.
January 22, 2012, 5:56 pmanon says:
Professor Zywicki,
Paul Krugman cordially requests you use his search tool:
http://krugman.blogs.nytimes.com/2012/01/22/harding/
January 22, 2012, 6:09 pmJoe - Dallas says:
The column is from paul krugman, granted he is a nobel prize winner in economics, however he has lost a tremendous amount of credibility in the last ten years due to his highly partisan analysis of economics. That particular article by krugman starts out in the first sentence stating “Every once in a while I get comments and correspondence indicating that the right has found an unlikely economic hero: Warren Harding.”
Starting out trying to disparage one side of the argument tends to indicate that the facts supporting your analysis are weak.
January 22, 2012, 6:10 pmrumpelstiltskin says:
No, it doesn’t. It tells the reader absolutely nothing about the facts or the argument. It just tells you that the writer is an asshole. And yes, Krugman is an asshole. But disparaging the other side is a rhetorical strategy and has no bearing on the actual facts. Anyone in any argument can always disparage the other side – whether there’s merit to either position or not.
Also, I was going to post the Keuhn stuff but I see someone has beaten me to it.
January 22, 2012, 6:17 pmsteve s says:
The other part of using the response to the 1920 recession as a model, is that you have to ignore what happened afterwards. That recession was followed by another one two years later. Then another one shortly after that. Is that really a model we want to use?
Steve
January 22, 2012, 6:54 pmsteve s says:
This is also a good explanation of the 1920 recession and recovery. As a bonus, the author cites unemployment figures from the 1890s recession. There was no fed, so this would be much closer to a market driven response. Not a quick recovery.
http://socialdemocracy21stcentury.blogspot.com/2010/10/us-recession-of-19201921-some.html
Year Unemployment rate
January 22, 2012, 7:08 pm1892 3.72%
1893 8.09%
1894 12.33%
1895 11.11%
1896 11.965
1897 12.43%
1898 11.62%
1899 8.66%
1900 5.00%
~aardvark says:
The usual wishful-thinking confusion of cause and effect–the debt came down because of the economic improvement, not the other way around. But, of course, to trickle-downers this does not matter. Why bother figuring out causation if correlation hides the confirmation bias so well?
January 22, 2012, 7:12 pmiawai says:
Just who are “people like Woods”? mises.org is filled with crackpots just as much as volokh.com is filled with crackpots; both site have detractors that like nothing better than slinging derogatory names at them, but don’t have a leg to stand on once it comes to an actual intellectual debate.
I frequent both websites, and have yet to meet a real crackpot here or there (official contributors only, commenters at either site can be off the reservation at times).
January 22, 2012, 7:17 pmIan says:
Joe — what’s interesting is that among economists his reputation hasn’t really fallen. If anything, it’s improved. He’s obnoxiously proud of it, but his 1998 paper on this liquidity trap was 10 years ahead of its time and is the starting point for a lot of work that’s been done in the last few years. Perhaps his reputation has sunk elsewhere, and perhaps some economists don’t like him as a person, but as an economist he’s no less respected than he was ten years ago.
January 22, 2012, 7:25 pmbyomtov says:
Joe – Dallas,
I don’t think so.
The thing is, what you call “partisan analysis” may simply be correct analysis. Sometimes one side is right and the other wrong. That you, or Zywicki, or anyone else, don’t like what he says doesn’t make him wrong.
If you can show how he’s wrong in this instance, go ahead. But just yelling “partisan” isn’t going to do it.
January 22, 2012, 7:36 pmmartha says:
?? “Harding = hero” is “unlikely” because (as Todd Zywicki notes) he is widely considered to be one of our worst ever presidents. How does this sentence disparage anyone other than Harding? It’s not like Krugman said, “Those idiots on the right think . . . ” or even “those on the right have lost a tremendous amount of credibility because . . . .”
January 22, 2012, 8:23 pmChris Rhodes says:
GDP includes government spending. So if, in the same scenario as before, the government borrowed money to pay people to dig holes and fill them back in, not only would we have 0% unemployment, but our GDP would skyrocket! No need to actually produce anything; just borrow (or print) gobs of cash to pay people to do useless work and our economy will be perfect! The numbers don’t lie!
(To complete the cycle of using bad and misleading statistics, next you’ll tell me that the CPI really measures the rate of inflation . . .)
January 22, 2012, 9:19 pmJon Shields says:
What I don’t understand is why anyone believes that we can cure a problem of insufficient aggregate demand by slashing aggregate demand.
The 1920-1921 depression followed very high interest rates, set in the interest of inflation fighting. The response to the depression was monetary stimulus (not monetary contraction). The problem was not too little aggregate demand; we were not even close to 0% rates.
In the current case, where we are at the zero bound with a collapse in aggregate demand, it seems that the most counterproductive thing one could do is to take an axe to aggregate demand.
It would be like saying “before, when I was too hot, and I felt bad, I turned on the air conditioner. I felt better. Therefore, I should do the same now, when it is too cold, since what made me feel better before will make me feel better now.”
January 22, 2012, 9:33 pmbyomtov says:
Just who are “people like Woods”?
People who make up numbers, who claim that neither Keynes nor Milton Friedman really understood the Depression at all, who believe that they are the persecuted carriers of Economic Truth, and that mainstream economics, for all its controversies, is a fraud, etc.
January 22, 2012, 9:34 pmJon Shields says:
Of course it includes Government spending! The reason one would not include it is if one did not want their model to show that government spending could ever help the economy.
If too much government spending and too much money printing were a problem, GDP (including *gasp* government spending) would show it. Too much borrowing would raise interest rates and crowd out private investment (lowering I). Higher taxes would lower consumption. More money printing would cause inflation, making the increase in GDP nominal (not real).
On the other hand, if too much government spending were not a problem, you would not see these problems, and GDP would go up. Low and behold, GDP went up (significantly).
Whether or not government spending works depends on whether or not we have too much saving and too little desired investment.
Imagine an economy with 100 people. One day, everyone decided to stop spending money. (Let’s say they wanted to hoard their money, because they feared hard times ahead.) Of course, everyone hoarding all their money would reduce the GDP to zero. There would be no desired investment, and maximum desired savings.
What if the government borrowed a portion of the savings, and used it to substitute for the previous (and now zero) consumer demand? That would increase economic activity, without any crowding out (since the problem was too little investment relative to savings — not too much investment). Government could spend huge amounts, and every additional dollar would be a net benefit (up to the point of aggregate demand hitting the economy’s capacity). It can do this, because it is not trying to compete with private investment — there is no private investment initially in this hypothetical.
On the other hand, imagine a 100 person economy where all the desired savings were met with desired investment. In that case, government borrowing would have to compete with private borrowing. Interest rates would go up; investment (and GDP) would not.
The key difference in the effectiveness of government savings is whether there is a savings glut. Austrians love to make the argument that taking money from Peter to pay Paul does not increase GDP. But they ignore the possibility that the money taken from Peter was not going to be spent or invested (i.e. put in treasuries), because of a net desire of the private economy to save.
January 22, 2012, 9:47 pmRicardo says:
Wow, that was a real zinger!
Seriously, some people have some awfully thin skin. I vaguely remember Milton Friedman and Anna Schwarz discussing the 1920 depression in their “A Monetary History of the United States” and I don’t think they treated it much differently than Krugman.
There was no implosion of the financial or banking system like in 2008 nor did the Fed hit the zero lower bound nor were households as heavily indebted as they are today. Instead, inflation was very high immediately after WWI (a consequence of inflationary finance during wartime) and the Fed clamped down on inflation and a severe recession resulted. The relevant comparison would appear to be the early 80s with the Volcker recession rather than America’s current situation.
January 22, 2012, 9:50 pmanon says:
http://www.youtube.com/watch?v=FopyRHHlt3M
Hey do you know Houston Lawyer?
January 22, 2012, 10:44 pmJRL says:
Gee, and what could it have been that caused this “private overstretch”? Certainly it couldn’t have been “tight money” caused by an irresponsible run up in interest rates by Greenspan and the Fed, going from 1.00% in July 2004, up to 5.25% in July 2006.
January 22, 2012, 11:34 pmJames Gibson says:
I think all this discussion shows is to try and put Recession or even Depression into a fixed equation or theory is the ultimate stupidity. The Recession of 20-21 had its causes that were specific, just as the Great Depression had its. The Recession just after WW2 is similar to the 1920-21 in that the release of the draftees caused an increase in unemployment, but the two again are not exactly the same. The later down turns and economic issues that occurred throughout the 50s, 60s and even 70s were also specific to the period. Thus, trying to created a one concept fitting all economic theory may be the biggest problem we have today
January 23, 2012, 12:18 amLord Keynes says:
“The only discussions I’ve seen of the 1920 Depression are those that support Harding. Has anyone written a good response to that story, because what I’ve read seems fairly compelling”
The Austrian account of the 1920-1921 recession is almost all wrong.
(1) It wasn’t even a depression. A depression is where real output falls by 10% or more. The revised figures of Romer show a GNP contraction of 3.47% from 1919 to 1921 – a mild recession.
http://socialdemocracy21stcentury.blogspot.com/2011/12/depression-of-19201921-austrian-myth.html
(2) The 1920-1921 recession lasted 18 months – that wasn’t a short recession at all by the standards of the post-1945 US business cycle; it was a long recession by modern standards, and by the standards of 1900-1933 of average length.
The recession of 1920–1921 had no serious financial crisis, no mass bank runs and collapses, no massive collapsing, debt-fuelled asset bubble, as in 1929-1933, and hence no debt deflationary collapse.
Certain sectors of the US economy actually benefited from positive supply shocks owing to the end of WWI.
The Federal Reserve had a major role in ending the recession by lowering inerest rates.
http://socialdemocracy21stcentury.blogspot.com/2010/10/us-recession-of-19201921-some.html
(3) Even by Austrian econmomic theory, there was no “recovery” at all, because there was a central bank (the Fed) that lowered interest rates. According to the Austrian trade cycle theory, this just caused another unsustainable business cycle.
http://socialdemocracy21stcentury.blogspot.com/2011/06/there-was-no-us-recovery-in-1921-under.html
All in all, the Austrian ramblings about 1920-1921 are nonsense.
January 23, 2012, 7:15 amAnderson says:
however he has lost a tremendous amount of credibility in the last ten years due to his highly partisan analysis of economics
Krugman is “partisan” to the extent that he is sick and tired of people making up bullshit. Try reading his blog for a week or two, if you aren’t so “partisan” that you can’t handle reading people who might disagree with you.
But really – “partisan”? A partisan for whom? Not the Democrats, obviously; he’s been highly critical of Obama and his administration.
January 23, 2012, 9:00 amRandoms of the week « Foseti says:
[...] What if a depression happened and there were no Keynesians? It would end quickly and be erased from history. [...]
January 23, 2012, 10:30 ambyomtov says:
Chris Rhodes,
Sort of. Since you like to complain about lousy statistics you shouldn’t overlook the fact that it does not include transfer payments like unemployment insurance and welfare.
Anyway, so what? You don’t think unemployment statistics tell us anything about the stae of the economy. You don’t think GDP tells us anything. I know. You have a Double Super Secret measure, known only to a select few, that tells you what’s going on.
Incidentally, government expenditures were 8% of GDP in 1933, and in the range of 9-11% from 1934-1937.
TZ and other Hardingites,
More information.
January 23, 2012, 10:33 amTracy W says:
Stupid question time. Government spending as a percentage of GDP in 1920 was a lot lower now than it is now – see http://en.wikipedia.org/wiki/File:Us_gov_spending_history_1902_2010.png. So, given that the government wasn’t spending as much back then, if the US economy in 1920 wasn’t more dependent on consumer spending as it is now, who or what was it producing for? Businesses only invest because someone, eventually, plans to sell to consumers or the government.
January 23, 2012, 10:35 amloki13 says:
“The only discussions I’ve seen of the 1920 Depression are those that support Harding.”
I think that’s the money quote from the OP. I know that confirmation bias exists, and Prof. Z. is welcome to discount the ample available evidence to the contrary (one might say the dominant, or non-Austrian, narrative), but it is difficult to understand how he was unable to find any of the discussions unless he wasn’t looking.
January 23, 2012, 10:39 amMichael Ejercito says:
For a better example, the manorial economy in medieval Europe had a near zero unemployment rate.
January 23, 2012, 2:00 pmAngus says:
Much of this is based on the historical work of Thomas Woods, which is generally appalling. I read one of his books and noticed a typical pattern to his footnotes. He’d cite about 30 books/articles on a subject, 29 of which reached conclusion “A.” One article reached conclusion “B.” Woods would agree with “B” because it fit his preconceived notions and dismiss the other 29 authors as partisan trash.
January 23, 2012, 2:14 pmAngus says:
At the time 40% of the population was still farm based. A lot of their production was for their own use, so they were consumers of their own products. Not quite the same as consumer spending from other sources.
January 23, 2012, 2:16 pmAdam says:
Yes, if you just mash up the data enough you can reach any number of surprising conclusions.
In other words, this post is simply wrong about the history of both periods.
January 23, 2012, 2:33 pmHarry Eagar says:
Let’s consider those farmers.
They had expanded at breakneck speed in response to both high commodity prices and patriotic urgings. With peace came contraction and the alternatives of government interference to manage the smaller demand or a rush for the exits.
Harding did nothing and disaster followed. For the remainder of the ’20s farmers pretty much dropped out of the monetized economy; the country banks were slaughtered.
If Professor Zywicki is finding studies that support Harding, he is looking only at ideological cranks, not to economic historians.
January 23, 2012, 2:45 pmUnindicted Co-conspirator says:
Shows what you know. Just because there’s no Fed doesn’t mean the government still can’t create economic problems through currency manipulation. The economic problems of the 1890s were entirely monetary, and shocks to a monetary system cause deep bruises that require much greater time to heal.
In the 1890s, the dollar, and thus the economy, was still on the gold standard. March 1891 saw the U.S. Treasury place a fee on the export of gold bars (used by importers to facilitate international exchange).
As a result, importers turned to exporting gold currency coin, which did not have an attached fee. This meant all the money that was used for circulation fled overseas. Today, you could liken it to all the change and paper currency under $50 face-value, except pennies, were no longer as readily available for domestic exchange transactions. Consumers had no way to spend their wealth, and merchants had no way to make change.
That’s really going to toss a wrench into how you shop, or how your or your neighbors’ businesses survive.
January 23, 2012, 3:47 pmUnlearningEcon says:
Is there a name for this fallacy? Accusing people of post hoc ergo propter hoc or correlation-causation when there is a clear causal link between the two variables we are discussing?
January 23, 2012, 3:56 pmHarryEagar says:
Comments continue to be screwed up.
Accessing this from my home computer earlier today, I got more comments than I do accessing it from my work computer 6 hours later.
What’s up with that?
January 23, 2012, 9:25 pmJoe_dallas says:
For those of you chastising me for my comment about Krugman and discounting his analysis due to his partisanship.
First – Krugman is a well known to be a good economist and his analysis of the 1920 depression and the response to the depression may be absolutely correct.
However – In his NY Times partisan commentary, he frequently makes intentional misstatements of material fact to make arguments unsupported by the actual facts. A classic example was his argument that the US should adopt economic policies similar to France claiming the European GNP growth at the time was greater than the US GNP growth, but citing statistics from Eastern european countries GNP growth. Not withstanding that the French GNP growth lagged US GNP growth by a substantial margin during the time frame he was arguing.
It is difficult to find a column he has written without at least one substantive factual misstatement.
For those reasons, It is difficult to determine when he should be treated with respect and when he should be treated with ridicule. It begs the question – when can you trust his analysis.
January 24, 2012, 9:33 amJoe_dallas says:
For those of you chastising me for my comment about Krugman and discounting his analysis due to his partisanship.
First – Krugman is a well known to be a good economist and his analysis of the 1920 depression and the response to the depression may be absolutely correct.
However – In his NY Times partisan commentary, he frequently makes intentional misstatements of material fact to make arguments unsupported by the actual facts. A classic example was his argument that the US should adopt economic policies similar to France claiming the European GNP growth at the time was greater than the US GNP growth, but citing statistics from Eastern european countries GNP growth. Not withstanding that the French GNP growth lagged US GNP growth by a substantial margin during the time frame he was arguing.
It is difficult to find a column he has written without at least one substantive factual misstatement.
For those reasons, It is difficult to determine when he should be treated with respect and when he should be treated with ridicule.
January 24, 2012, 9:38 amSonicfrog says:
Yep. When many discuss the various crashes / depressions of the last century, they often forget to recognize that the economic machine that we know and live in today is much bigger and much more connected to our daily lives than those who lived even 50 years ago. And the farther back in time you go, the more pronounced the changes are.I’m not using actual measures of the time, but lets say, in 1920 50% of the US population was agrarian based and worked on the family farm. They did sell some of their product, but also shared with the neighbors in hard times to keep things going. When hard times hit, as in the economic measures we go on about today, they were in effect somewhat sheltered from the repercussions (to a point). They also often excluded from the stats themselves, as it was much more difficult to get stats for those rural area. The stats tended to reflect what was happening in the urban industrial / financial sectors.
Got to go have some breakfast now. Will revisit in a while.
January 24, 2012, 11:31 amDilan Esper says:
Seriously, there isn’t a “CLEAR” causal link between ANYTHING in macroeconomics. There isn’t enough data and there’s too many variables.
At best, you have very ambiguous causal links, and everyone reads them through their ideological politics.
January 24, 2012, 1:30 pmHarryEagar says:
I agree with sonicfrog in general, but prior to the 1920 crash, most farmers — even southern sharecroppers who may not have handled $10 cash money in the course of a whole year — were completely connected to the world commodity exchange system.
And up until the 1920, renters and commercial farmers participated in the monetary economy.
It was only during Coolidge prosperity that American farmers quit using money. They dropped out of the monetary economy almost entirely, except that each had to scrape up enough cash to pay land taxes. Otherwise, they did disconnect from the the modern exchange system.
The country banks failed by the thousand, and the merchants in the country towns shrank to next to nothing.
Somehow, you know, the admirers of the Austrian school, of Coolidge, of Reaganomics etc. seem not to have noticed this.
There are a number of excellent memoirs by people who grew up on farms describing what it was like. At least one made the NYT bestseller list.
Other than purblind ideological ignorance, there is no excuse for not knowing about this.
January 24, 2012, 3:09 pmPierre Corneille says:
Probably this is the best comment I’ve read on this thread so far.
January 24, 2012, 7:56 pmSonicfrog says:
Agreed, but it was very slow between an event that happened in the economy and the shockwaves to hit the farm communities. The reason why is that those communities were up until the twenties fairly isolated in the way they worked. There was a bank or two, but they were very local oriented. Their customer base was the farm community and any legal (and sometimes illegal) business that depended on the farm cycle for their business. Everyone understood that some years were going to be good, and others were going to be not so good as far as the harvest goes. So a certain amount of economic flux adjustment was built into the system.
One thing changed the dynamics of the farm / bank economy in the 1920′s was the automobile. As the number of people who owned cars increased, and improvements in roads improved after World War 1, the average farmer who owned an auto could travel farther and miss less work on the farm. Instead of being pretty much tied to the local general store, the average farmer could now drive to the big city, shop at the larder department stores, and get better farming technology for cheaper prices.
The results were that more and more money moved out of the formerly locked in farm communities. This put a strain on the rural general stores and the banks that supported them. This is one of the reasons why country banks began to fail at an ever increasing rate during the 1920′s.
January 24, 2012, 9:48 pmDilan Esper says:
I said basically the same thing and I got accused of stating a fallacy.
January 25, 2012, 12:59 amStephen Houghton says:
Am I the only one who notices that angry bear makes a big mistake. A change in tax rates in 1922 would have been passed in 1921 and the change in incentives for all future investments would come at the moment the rates were changed by law, not when they came into effect.
January 25, 2012, 10:57 amUnlearningEcon says:
In that case we may as well just give up!
Obviously there’s a clear causal link between high interest rates, declines in government spending and overall AD. There’s plenty of evidence to support this. I think you are overstating your case just a little bit.
January 29, 2012, 8:47 am