A commenter sent me the following:
This slim volume describes a weighty and wonderful event. In 1920, the American economy entered what would presently be diagnosed as a depression. The successive administrations of Woodrow Wilson and Warren G. Harding met the downturn by seeming to ignore it—or by implementing policies that an average 21st century economist would judge disastrous. Confronted with plunging prices, incomes and employment, the government balanced the budget and, through the newly instituted Federal Reserve, raised interest rates. By the lights of Keynesian and monetarist doctrine alike, no more primitive or counterproductive policies could be imagined. Yet by late 1921, a powerful, job-filled recovery was under way. This is the story of America’s last governmentally unmedicated depression.
Sometimes it seems like everyone wants to pick on the monetarists, including to some extent even market monetarists. Monetarism is ridiculed by Keynesians, Austrians, MMTers, Real Business Cycle supporters, fiscal theory of the price level proponents, etc., etc. It seems out of date, with not many young supporters. It allegedly “failed” in the 1979-82 monetarist experiment, even though:
1. That period successfully broke the back of inflation, as the monetarists predicted and others doubted, especially given the Reagan fiscal stimulus. It led to a severe recession, as the monetarists predicted. And it was followed by a strong recovery, as the monetarist predicted (but the Keynesians thought unlikely without a rise in inflation.)
2. Furthermore, the policy of 1979-82 was not truly monetarist (money growth varied), and the monetarists would never have expected velocity to be stable during a period of rapid disinflation. Their argument was that V would stabilize in the long run, if money growth were stable in the long run. That was never tried.
I find even that weaker claim to be dubious, which is one reason that I am not a traditional monetarist. And of course Friedman made some bad predictions in the 1980s (but since when do bad predictions discredit a model?) Nonetheless, let’s give monetarists their due; contrary to the implication of the quotation above, Friedman and Schwartz’s Monetary History does explain the depression of 1921:
M2 money supply:
May 1920 peak: $30,304 million.
Sept. 1921 trough: $27,830 million
December 1922: $31,920 million
Monetarists would predict a steep recession and fast recovery. And that’s what happened.
PS: Rereading the quote, it doesn’t actually say the monetarists failed to predict a fast recovery, but I sort of think that was implied. Did I misinterpret the quotation? How would the average person interpret the quote?
PPS. I have not read Grant’s book, but I do believe the 1921 depression is a good example of the natural recuperative powers of a free market economy. In that sense, it could be viewed as being inconsistent with old Keynesianism, as well as modern variants that say wage cuts will make the depression worse, and that massive fiscal stimulus is needed. Of course Keynesianism is a slippery critter, which is hard to pin down. They would probably point to the lack of a zero bound problem. They mention positive interest rates when convenient (1921) but ignore positive interest rates when inconvenient (eurozone 2008-12.)