Part of our October series on Jobs & The Economy, featuring written op-ed pieces and Q&As with Delaware’s business, labor and government leaders.
In comments by the Federal Reserve Chairman regarding the deteriorating economic conditions, he said there would be “a considerable degree of unemployment, but not for very long, and … after a year or two of discomfort, embarrassment, some losses, some disorders caused by unemployment, we will emerge with an almost invincible banking position, prices more nearly at competitive levels with other nations, and be able to exercise a wide and important influence in restoring the world to a normal and livable condition.”
The year that the Federal Reserve Chairman made these statements was, of course, 1919 just prior to a horrific recession in which, peak to trough, U.S. industrial production dropped 23% and GNP fell 8.4%.
Of course, then as now, many wanted an activist government intervention. Indeed, there were broad calls by banking officials, politicians, and “progressive” groups to deposit unspent Treasury money into local banks.
The Housewives League and the Citizens Committee of Bronx County, meeting to protest the high price of bread in mid-1921, were presented with an Obama-esque “redistribute the wealth” resolution to scrap the Federal Reserve in favor of a pure government bank “and to have that bank so function that all the money shall be available to the people.” These same voices appealed for loans from the War Finance Corporation, which had continued to lend despite the peace.
Woodrow Wilson’s Treasury Secretary at the time, Democrat Carter Glass, said the following in November 1920, “The first impulse of many who [are] searching for a way out [is] to turn to the government, and especially to the Treasury, as the sole instrumentality for full economic salvation.” To these calls, Secretary Glass responded, “The Treasury [has] no money to lend and no money to deposit except for government purposes. It is not in the banking business and should not be.”
Glass was a Democrat, but his policies were continued by the incoming Republican Treasury Secretary, Andrew Mellon. Secretary Mellon stated in 1922 that “[t]he Treasury, on its part, aims above all to keep its own house in order, in the belief that a sound financial structure will in the long run afford the best basis for extending needed assistance to Europe and for a healthful revival of domestic business on constructive lines.” No half billion dollar loans to Solyndra and no bank bailouts.
What happened? During the 18 month economic collapse that ran through the calendar years 1920, 1921, & 1922, the Treasury ran surpluses. Let me restate that – the U.S. government during a post-war economic decline of almost 9% ran surpluses. Furthermore, the U.S. government from 1920-1923 never even considered a “New Deal” money-spraying, “stimulus” program.
Compare that response to today, where Fed Chairman Ben Bernanke has, in his words, dropped money “from helicopters” into the system to stop deflation and force inflation. In 1921 Fed Chairman, Ben Strong, said about the 25% deflation roiling the country under his tenure, “[n]o one could have stopped it and no one could have started it. In our opinion, it was bound to come.” No bi-planes, the helicopters of his time, were needed to inject cash into the system.
The 1930’s Great Depression, the yardstick by which current Fed Chairman Ben gauges his responses, remained with us for nearly a decade. In that downturn, employment levels in the U.S. did not reach 1929 levels until 1943. Today’s Fed Chairman Ben is matching the 1930’s results in that today’s Great Recession has under-employment continuing to remain at double-digit levels three and a half years into the economic crisis.
In contrast, the 1920-1921 depression was as brutal as it was short. Average wage declines were 6.6% while commodities were down 36.8%. But, the bottom they hit and then… bounced. Within 18 months, in August of 1921, the economy turned and by May 1923, the U.S. reached new highs in industrial production. So, for the same period of time comparing 1920 versus 2008 (or the 1930’s), the U.S. was back into full production back in 1923. Today in 2011, we’re not even close and are actually expecting a new recession (just like the 1930’s).
Today, we focus only on the Great Depression. Why? Because it was great. The policy responses developed by Keynes and others relative to the Great Depression were wrong. But they have been highly studied and fill history and economics textbooks. So today’s government economists only focus on the tools tried then. It was, afterall, a GREAT depression.
By comparison, the quickly resolved 1921 depression is hardly a footnote, but that is where we should focus on the policy responses — on the actions that avoided a potential great depression in 1920-1921. If we focused on those policy responses that actually did work, then we might be applying the proper lessons of the past to the problems of the present.
Our choice is clear – follow policies that have, historically and repeatedly (Japan since 1992, for example), led to decades long periods of stagnation and pain, or we can follow policies that, when taken, resulted in a quick, painful blow and strong and robust rebound.
1921’s Fed Chairman Ben had it right, “no one could have stopped it.” 2011’s Fed Chairman Ben is wrong in that he believes that he can stop it. In the end, the market will win. Bottoms will be found. Empty balance sheets will be scrapped. Like the oil filter ad used to say, “You can pay me now, or you can pay me later.”