Grant, Forgotten Depression of 1921, Interest rate suppression, monetary policy

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Market resiliency:

The story of America's last governmentally unmediated depression is told by James Grant in "The Forgotten Depression: 1921: The Crash that Cured Itself."
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Economic processes were allowed to eliminate unneeded wartime economic activities without significant government intervention. The task was completed with the usual brutal efficiency of competitive markets.

The boom and bust of 1919-1921 demonstrated the natural resilience of a relatively unfettered capitalist market economy facing the task of rapidly shifting to peacetime production while eliminating all the massive levels of economic activity attributable to wartime conditions.
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The economic dislocation was massive, Grant amply demonstrates. Market economic processes were allowed to eliminate unneeded wartime economic activities without significant government intervention. The task was completed with the usual brutal efficiency of competitive markets. It produced a recovery far more rapid and economically stable than anything achieved by government intervention in the Keynesian mode during subsequent economic contractions.
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Recovery is occurring but it is debt fueled, painfully slow, accompanied by distorted investment flows and frothy with asset inflation bubbles. Recovery is thus increasingly unstable.	The Federal Reserve has an interest rate suppression tiger by the tail. The Fed is today more than six years into an extensive effort to stimulate economic recovery by means of artificially low interest rates. Fed members remain apparently intentionally ignorant of the rapid accumulation of noxious economic and financial side effects attributable to their nostrums. ? Recovery is occurring but it is debt fueled, painfully slow, accompanied by distorted investment flows and frothy with asset inflation bubbles. Recovery is thus increasingly unstable. Whether or not interest rate suppression is more stimulatory than pushing on the end of a string, after a few years it clearly results in more economic and financial distortion than economic stimulation. ? The Federal Reserve insistently takes credit for the recovery, but there is no way to prove how much the recovery is due to the low interest rates and how much is due to the natural resilience of the economy. They are like the pagan priests who asserted that the recovery of the sun after the vernal equinox was due to their ritualistic efforts. ?
The longer interest rates remain suppressed, the greater are the economic distortions and the world's dependence on debt capital and thus the more unstable are the resulting economic conditions.	THERE IS NO SAFE TAKEOFF POINT for allowing the return of market interest rates. Artificially low interest rates are causing debt-to-GDP ratios to climb to dizzying heights all around the world. The dollar is still the world's primary reserve currency, and other major central banks all over the world are resorting to Keynesian policies. However, the longer interest rates remain suppressed, the greater are the economic distortions and the world's dependence on debt capital and thus the more unstable are the resulting economic conditions. ? Do Keynesian policymakers still believe even after their numerous previous failures that they can obsolete the business cycle? ?
The result after six years is a massive misallocation of capital typically involving among other things the over-expansion of productive facilities, increasing levels of business and consumer debt, fiduciaries driven into higher-risk securities in search of yield, and increasing levels of asset price inflation.	Without guidance from market interest rates, businesses and investors have no idea what their time-cost of money is. The result after six years is a massive misallocation of capital typically involving among other things the over-expansion of productive facilities, increasing levels of business and consumer debt, fiduciaries driven into higher-risk securities in search of yield, and increasing levels of asset price inflation. ? The Masters of the Financial Universe at the Federal Reserve and other central banks are scared to death of what will happen when interest rates are again allowed to increase to market levels, or when the next economic contraction falls upon a heavily indebted and increasingly distorted economic world. Their political masters don't even want to think about the increase in debt servicing costs that will afflict their budgets. They all tremble as they frantically maintain their grasp on the tail of the temporarily suppressed interest rate tiger. ?

Monetary expansion in the amount of about $4 trillion has been largely sterilized by an equally massive increase in bank reserve requirements.

Hundreds of thousands of pages of new regulations and substantial increases in litigation risks have been imposed, substantially altering risk-reward ratios. Yet the reforms have done nothing to eliminate the primary factors involved in the housing and mortgage securities bubbles that collapsed so spectacularly.

Interest rates are once again being suppressed for years at a time. Fannie Mae and Freddie Mac and affordable housing policies remain, and the size of the major banks that are too-big-to-fail has in many cases actually increased.

As usual, and whether in the U.S. or Japan or around the EU, budget deficits do not appear to have any stimulatory economic impact independent of central bank suppression of interest rates.

All other administered alternatives have clearly failed or made matters considerably worse.

A massive monetary expansion has been sterilized and thus has had little stimulatory impact. Monetary expansion in the amount of about $4 trillion has been largely sterilized by an equally massive increase in bank reserve requirements. About $2.6 trillion of reserves from major banks are kept in the Federal Reserve where they do not circulate. Money that does not circulate does not stimulate price inflation and does not stimulate much economic recovery.

Circulating currency has risen from about $800 billion to about $1.35 trillion, but with the increased reserve requirements generally applicable throughout the rest of the financial system, most of the $4 trillion has thus been successfully sterilized. This is reflected in the sharp decline in monetary velocity figures, down about 40% for M1 and 23% for M2.
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What the Fed achieved was initially to restore the balance sheets of the major banks, undoubtedly a major achievement but with little further economic impact. It has also made sure that it has sufficient resources on its books so it does not have to go begging to Congress next time it wants to bail out some major banks that do not have sufficient collateral acceptable for normal Federal Reserve loans. It does not have to explain the crony capitalism that does not permit such banks to fail.

Economic "reforms" have imposed massive additional fetters upon the economy instead of facilitating market mechanisms. Substantial increases in litigation risks and hundreds of thousands of pages of new regulations - currently accumulating at over 80,000 pages per year - have been imposed, substantially altering risk-reward ratios. Yet the reforms have done nothing to eliminate the primary factors involved in the housing and mortgage securities bubbles that collapsed so spectacularly during the Credit Crunch.

It is the small community banks that have been punished with compliance costs that they cannot afford. Over 500 have closed since 2008. Only one small bank has opened since 2010. Administrative costs have gotten so high that it has become unprofitable for banks to provide the small loans that small businesses often need.
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Interest rates are once again being suppressed for years at a time. Fannie Mae and Freddie Mac and affordable housing policies remain, and the size of the major banks that are too-big-to-fail has in many cases actually increased. Competition from smaller banks has been materially reduced. That will teach the big banks to behave better.
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Of course, what else is to be expected when the Dodd-Frank reform effort was led by the politicians who were primarily responsible for the culpable policies? Government regulatory failures were the primary cause of the Credit Crunch recession. See, Morgenson & Rosner, "Reckless Endangerment." So Rep. Barney Frank (D-Mass.) and Sen. Christopher Dodd (D-Conn.) massively increased the government's regulatory authority and protected all the culpable policies before fleeing town to avoid having to explain their actions in any detail to the voters. All blame was shifted to private sector miscreants, of which there are always many available to serve as primary scapegoats.
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However, Silicon Valley is coming to the rescue. New online financial entities are as yet relatively unregulated and are thus able to expand exuberantly.

Budget deficits are declining but remain massive. As usual, and whether in the U.S. or Japan or around the EU, budget deficits do not appear to have any stimulatory economic impact independent of central bank monetary expansion and suppression of interest rates. Thus, interest rate suppression policy is alone in the economic stimulation breach.

Loose monetary policy, suppressed interest rates and restrictive government result in an unstable recovery..

What would have happened without a Keynesian response to the Credit Crunch recession? Counterfactuals are notoriously hard to prove. However, after six years of a disappointedly slow recovery and the generation of massive financial and economic distortions as a result of loose monetary policy, suppressed interest rates and restrictive government, this counterfactual deserves serious consideration.
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The 1920-1921 depression:

Experience during the depression of 1920- 1921 provides a clear historic picture of the natural resiliency of capitalist markets.
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The 1920-1921 depression was the worst economic contraction in over a century to that time. It was an economic aftershock of the Great War, but the rapidity and completeness of recovery spared the nation a lengthy ordeal.

Discussion of the 1920-1921 depression is generally avoided by Keynesian economists, and those that do deign to mention it denigrate its severity. However, James Grant, in "The Forgotten Depression: 1921: The Crash that Cured Itself." points out that it was the worst economic contraction in over a century to that time. It was an economic aftershock of the Great War, but the rapidity and completeness of recovery spared the nation a lengthy ordeal.
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Competitive pressures became especially brutal for North American agriculture that had expanded exuberantly to fill in for European production devastated by the war. By 1920, European agriculture was rapidly recovering and North American agricultural exports were in rapid decline back to peacetime levels. Price levels declined far and fast.
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The Federa Reserve System fulfilled its intended central banking role as lender of last resort, providing funds so that solvent but temporarily illiquid banks would not be swept away with insolvent banks.

However, the problems were seemingly ignored by the governments of first Woodrow Wilson and then Warren Harding. It would be market competition rather than political influence and government ministries that would determine who would survive and who would fail.

"[They implemented] 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."

The new Federal Reserve System did act. It fulfilled its intended central banking role as lender of last resort, providing funds so that solvent but temporarily illiquid banks would not be swept away with insolvent banks.

"What the government did not do was socialize the risk of financial failure or attempt to steer and guide the national economy by manipulating either the rate of federal spending or the value of the dollar."

It was market mechanisms that laid the foundation for the booming recovery of the 1920s.

"Through the agency of falling prices and wages, the American economy righted itself." The depression performed its massive restructuring chores in just 18 months.

It was market mechanisms, particularly the price mechanism, not government administered alternatives, that quickly and efficiently orchestrated the creative destruction process and rapid recovery. It was market mechanisms that laid the foundation for the booming recovery of the 1920s.
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Grant explains that prices and wages fell "to entice consumers into shopping, investors into committing capital and employers into hiring. Through the agency of falling prices and wages, the American economy righted itself." The depression performed its massive restructuring chores in just 18 months.

"Herbert Hoover, Harding's secretary of commerce, was seemingly champing at the bit to act; the slump was ending by the time he swung into action. When, as the 31st president, Hoover did intervene - notably, in an attempt to prevent a drop in wages - the results were unsatisfactory."

Wages rose rapidly but nevertheless fell far behind the rapidly rising prices. Industrial strikes reached record levels, and were accompanied by left wing populist agitation.

Inflation quickly demonstrated the noxious consequences of such irrational exuberance. Asset bubbles expanded exuberantly with the soaring prices, and industrial facilities were frantically expanded. Agricultural production that had been massively expanded to meet wartime demand expanded even further, supplemented by the new expensive implements of agricultural mechanization.
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Wages rose rapidly but nevertheless fell far behind the rapidly rising prices. Industrial strikes reached record levels, and were accompanied by left wing populist agitation. Progressive and Socialist political influences reached unprecedented levels.
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Few seemed to appreciate what the impact of European agricultural recovery would mean for the bloated and distorted production levels of North American agriculture.

There already were schemes afoot designed to stabilize the purchasing power of gold-based currencies. Economist Irving Fisher - a Keynesian before Keynes - was most prominent among these schemers.

Price inflation at these levels clearly had to be curbed. Few seemed to appreciate what the impact of European agricultural recovery would mean for the bloated and distorted production levels of North American agriculture.
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Of course, political leaders - led by President Wilson - blamed greedy profiteering businesses for the price inflation. However, Grant makes it clear that such periods of chronic price inflation are always caused by the money authorities. Inflation was generated by governments in Washington and in the capitals of the other belligerents.

"The warring nations had fought their fight on the cuff. They spent more than they raised in taxes, and they borrowed the difference. And to one degree or another, they printed the money they couldn't otherwise secure by taxing the people or tapping the people's savings. By means of the printing press, needy states created the means to buy without creating a corresponding supply of things to buy. More money in pursuit of a reduced supply of goods - the business of war making having preempted civilian production - implies even higher prices. Cockeyed finance was the cause of the great postwar inflation. Rising prices were the symptom."

Price fluctuations in terms of gold had previously been persistent and sometimes volatile, but always within a remarkably steady range. An ounce of gold would buy the same basket of commodities in 1930 as in 1650. Nevertheless, the cycles of ups and downs could be disconcerting. The Great War upended monetary arrangements just as it upended everything else. There already were schemes afoot designed to stabilize the purchasing power of gold-based currencies. Economist Irving Fisher - a Keynesian before Keynes - was most prominent among these schemers.
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Supporters asserted that the System would prevent financial panics. Critics nevertheless correctly predicted inflationary booms followed by financial panics and economic busts.

The System did not create credit. The Reserve banks would "rediscount" - lend - to banks that wanted to turn their sound self-liquidating loans into cash. Federal Reserve notes were thus backed by gold, commercial paper, and the credit of national chartered banks, as well as the credit of the federal government itself. The System would respond passively to the needs of the community; it "would not determine what those needs ought to be." The Act reduced reserve requirements for major member banks and permitted foreign branches.
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Supporters asserted that the System would prevent financial panics. Critics nevertheless correctly predicted inflationary booms followed by financial panics and economic busts.

For the first 100 years under the Federal Reserve System, the critics have been proven spectacularly correct. The politicians quickly grabbed control of the System and one step at a time, eliminated original monetary constraints that imposed discipline on the System.
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The System has thus played important roles in producing the disasters of the Great Depression, the Keynesian inflationary morass of the 1970s, and the "dot-com" and "Credit Crunch" booms and busts of the 21st century. There is no way that a rules-based system based on gold - the "barbaric metal" - could have performed nearly so badly.

Price inflation quickly followed sharply higher, as one would expect. The new Federal Reserve System was in no position to object and was probably not inclined to object.I

The Great War and the appointment of Benjamin Strong as the first governor of the Federal Reserve Bank of New York dominated the early years of the System. Strong characterized American bankers as "more or less an unorganized mob." He was viewed by many in the banking community as the successor to J.P. Morgan, with a glare and a nose that were almost as prominent. The N.Y. Fed under Strong quickly became the most important of the 12 regional Federal Reserve banks, and Strong dominated the first 15 years of Federal Reserve history.
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The author presents an interesting picture of the financial and economic turmoil caused by the completely unexpected onset of war at a moment when the System was just beginning to get organized. The emergency was met pursuant to an ad hoc financial arrangement funded by U.S. Treasury notes under the 1908 Aldrich-Vreeland Act. Gold was physically shipped to Ottawa to quench England's wartime demands for gold.
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Initial fears of economic catastrophe quickly disappeared under a surge of wartime export orders for food, clothing and munitions. The likelihood of a long war was widely disparaged. Export orders nearly doubled in the first two years, the Dow rose almost 82%, GDP increased about 8%, but consumer prices rose only 1%.
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Gold flowed into the U.S., swelling the "monetary base" by over 20% by 1917. When the U.S. entered the war, Strong set aside his conservative banking practices for the duration. He became "the Treasury Departments monetary yes-man." However, initially, all Federal Reserve notes were still based on self-liquidating bills and loans so that monetary expansion would be easy to reverse when the war ended. Four Victory loans brought in $21.5 billion. The national debt had been just $1.2 billion in 1916.
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Taxes covered less than 30% of the war costs, and banks took up a large share of the Victory loans. Thus, the System ultimately had to directly pump $330 million in fiat funds into the Treasury. It began lending against collateral of Treasury securities at artificially low interest rates. Treasury obligations became preferred collateral, and there was a rapid expansion of financial assets.
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Price inflation quickly followed sharply higher, as one would expect. The new Federal Reserve System was in no position to object and was probably not inclined to object.

"The ensuing inflation would poison American politics, embitter the relations between American labor and capital, distort the structure of American production, test the Federal Reserve (and find it wanting) and set the stage for a worldwide inflationary depression."

War socialism:

The Wilson administration grabbed control of gunpowder, coal, railroads, telephone and telegraph activities.
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Even after the end of the war, the administration's economic problems kept multiplying. Price inflation was raging at over 15% by the middle of 1919.

Ideologues considered it a test run for peacetime socialist policies. However, there were drastic coal shortages during a cold winter, railroad operations were fouled up, and a new government-owned powder works produced no powder until the end of the war. Luckily, Du Pont produced 35 million pounds after initially being spurned by the administration.

"Ten months after the American declaration of war, American-made planes and machine guns had still not made their appearance in France. The administration's much-vaunted ship-building program was drastically behind schedule. The cost of living was zooming higher. And now, on top of 'Meatless Mondays' (an institution of the food administrator, Herbert Hoover), came a succession of 'Heatless Mondays.'"

Even after the end of the war, the administration's economic problems kept multiplying. Price inflation was raging at over 15% by the middle of 1919. However, Wilson's mind was focused on the Versailles peace treaty. Wilson seemed oblivious to the fact that the Republicans now controlled Congress. He had neglected to include any of them in his Peace Treaty team, and had stubbornly refused any compromise or accommodation with Congress.
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To the extent Wilson thought at all about the economy, it was definitely from a regulatory and socialist perspective. Labor strife and race riots would have to take their turn after ratification of the treaty. The "red scare" was being dealt with by others. A worldwide influenza pandemic was killing more people than died in the Great War.
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Suddenly, the president was incapacitated. The author summarizes the drama. Most official correspondence was left to pile up except for some answered by a ferociously protective Mrs. Wilson. Suffice it to say that the nation was on autopilot as it plunged ahead on its inflationary track.

"So the government that during the war had seemed to be everywhere and anywhere now grew slack and inert."

Depression:

The Federal Reserve banks began raising interest rates in November, 1919. The increase was sufficiently surprising and steep "to jolt the formerly imperturbable stock markets." However, the federal government was so grid locked that observers asserted it had gone out of business.

"Circumstances had set the stage for the last governmentally untreated business depression in America."

The speed of the decline in economic prices was faster than during the Great Depression.

Despite some efforts by modern economists to disparage its severity, the 1920-1921 depression was clearly a depression of significant magnitude.

How bad was the 1920-1921 depression? The statistics of the day were very rough and scholarly efforts to reconstruct them decades later necessarily leave much to be desired. Efforts to measure the services sector did not even begin until 1990. However, economic markets provide their usual precise picture.
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The Dow - then of 20 leading stocks - peaked at almost 120 in November of 1919. It fell about 46.6% to almost 63 in August, 1921. The speed of the decline in economic prices was faster than during the Great Depression. During a 12 month period, wholesale prices fell almost 36.8%, consumer prices fell 10.8%, and farm prices fell 41.3%.
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Commercial failures tripled and the aggregate liabilities of bankrupts climbed more than fivefold from $113 million to $627 million. It was the only time since 1899 that manufacturing output had dropped. Liberty bonds plunged in price in response to the rising interest rates, putting the credit of the U.S. in question.
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Indeed, all the allied nations were hard hit. The defeated powers had suffered their depression a year earlier. Despite some efforts by modern economists to disparage its severity, the 1920-1921 depression was clearly a depression of significant magnitude.
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The budget, was balanced, interest rates were raised to protect the Feds gold position, and the markets were left to do their ruthless work.

The federal government's response was traditional. Steps were taken to balance the budget, interest rates were initially raised to protect the Federal Reserve System's gold position, and the markets were left to do their ruthless work, sorting out matters of supply and demand, prices and wages.
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The adjustment process thus turned out to be remarkably fast. There would be no Depression Decade.
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By the second half of 1920, European agricultural production was coming back on line. The average price of 10 leading crops fell by 57%.

The economic slide began in the spring of 1920, catching all economic factors with bloated expectations. By summer, the economy was in free fall. Inventories swelled quickly to alarming levels Prices began to plummet.
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The collapse of the auto industry was especially severe, wiping out Bill Durant, the founder of General Motors. Durant had held large amounts of GM stock on margin. Monthly sales of GM cars declined from an average of 52,000 to just 6,150 in January, 1921. Harry Truman and Eddie Jacobson lost their haberdashery shop.
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By the second half of 1920, European agricultural production was coming back on line. The average price of 10 leading crops fell by 57%. Prices kept falling but costs remained at inflated levels. Cotton declined to 10.3¢ per pound in June 1921 from 41.4¢ per pound in April, 1920. Agriculture contributed about 17% of national income and employed 28% of the workforce at that time. Almost half the population was still rural.
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Unemployment estimates vary widely. A Labor Department canvass indicated unemployment in excess of 15%, not counting the usual substantial underemployment figures inevitably accompanying economic contractions.
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The 1¼% interest rate increase in January, 1920 is still the Fed's single most violent policy stroke.

Wholesale prices just kept rising - up 17.5% in the first six months of 1920.

Led by the N.Y. Fed, the Federal Reserve System began moving vigorously against inflation in November, 1919. Fed rediscount rates rose from 4% to 4¾%, and then to 6% in January, 1920. The 1¼% interest rate increase in January, 1920 is still the Fed's single most violent policy stroke. However, the 40% gold collateral requirement was under threat. Fed gold holdings were down to 42.7% system-wide and had to be protected to keep Federal Reserve dollar notes "as good as gold."

Strong, like Paul Volcker in 1980-1982, was determined to shove the inflation genie back into its bottle. WW-I inflation ran through 1919 and even into 1920, cutting the purchasing power of the dollar approximately in half.

The sudden, initiation of rate increases caused some initial panic, with overnight money market rates spiking to 30% and the Dow tumbling 12.8% in November, 1919. As might be expected, price inflation once established became a tough customer. Wholesale prices just kept rising - up 17.5% in the first six months of 1920.
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A heavily unionized workforce in the U.S. was stoutly resisting any general decline in wage rates. But falling prices led to increasing corporate losses, major production cutbacks and increases in unemployment. Thus, wages began declining in many ways and, inevitably, wage rates, too, were successfully cut back.

The beginnings of the economic collapse are traced by Grant to the busting of the silk bubble in Japan in April, 1920, as orders from America began to fall short of expectations. The depression was truly on a global scale.
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A Tokyo bank collapsed in mid-April, followed by a sharp drop in American stock markets. Retailers began major shop-wide discount sales. "As if someone had flipped a switch, sellers' markets became buyers' markets." There was an immediate wave of inventory order cancellations.
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The Dow hit its high on Nov. 3, 1919, at 119.62, but the railroads had already been in retreat since the previous May reflecting a turn in economic activity. The stock market had become frothy with legions of new small investors arriving at the party. Margin traders were paying interest rates as high as 20% for their money.
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Moreover, postwar conditions in Europe were terrible and in some instances finances were continuing to disintegrate. The depression was indeed a worldwide phenomenon. A heavily unionized workforce in the U.S. was stoutly resisting any general decline in wage rates. But falling prices led to increasing corporate losses, major production cutbacks and increases in unemployment. Thus, wages began declining in many ways and, inevitably, wage rates, too, were successfully cut back.
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The sudden turn in business conditions had the expected impact on the nation's banks. Many had been afflicted by irrational exuberance in their lending practices. National City Bank, the nation's largest depository institution, is used be Grant as a prime example.
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Strong explained his plans for interest rate hikes months before they were implemented. His expectations for the results were prescient. The inflationary boom had already built up to dangerous levels resulting in serious levels of over-expansion in capacity and inventories that would result in serious losses as the inflation is brought to a halt.

"I believe that this period will be accompanied by a considerable degree of unemployment, but not for very long, and that after a year or two of discomfort, embarrassment, some losses, some disorders caused by unemployment, we will emerge with an almost invincible banking position, with prices more nearly at competitive levels with other nations, and be able to exercise a wide and important influence in restoring the world to normal and livable conditions. One must have a theory of these things to work on, and at least the courage to practice and state it."

Inflation had dangerously distorted prices. Now, "with a deep faith in the self-correcting nature of markets," Strong and the other officials of the Federal Reserve banks expected deflation to set them right. The N.Y. Fed gave its version of an "irrational exuberance" warning and raised its discount rates.

"One did not have to understand Dow's theory to intuit that the postwar boom was ending. Anyone could see that money was getting tighter. Margined speculators were paying up to 20 percent to 'play with stocks,' as the Journal put it, and they paid gladly. The market was going up, was it not? That much was evident to the miscellaneous company of lay investors who were knocking down Wall Street's doors. Hotel chefs, undertakers, union officials and leisured ladies were among the latecomers to the frolic."

The crash in major agricultural commodities was "without parallel" among price movements running back to 1800.

The depression seemed to ease in the final quarter of 1920 but economic conditions really hit the skids in the first half of 1921.

However, the economic turn in the second quarter of 1920 was not reflected in the statistics available to the Federal Reserve at that time. Price level statistics were still rising. The N.Y. Fed thus raised its discount rate for commercial paper to 7% on June 1, 1920, and the other Reserve banks soon followed.
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The decision was neither unanimous nor popular. Congress was already asking questions about the 6% rate. The 7% rate conflicted with usury laws in many states. However, the inflation genie simply had to be shoved back into its bottle, and market discount rates were already above 7%.
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Price deflation began for various markets at various points throughout 1920. The crash in major agricultural commodities was "without parallel" among price movements running back to 1800. Both cotton and stock market declines actually began on January 3, 1920. The Dow closed at 104.73 on January 3, 1920, and declined to 66.75 on December 21. The loss for the year was 39%. The eponymous Ponzi scheme collapsed in August, 1920.
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Railroads held up well for most of the year, reflecting the sequential nature of the economic contraction. In those days before superhighways, the economy moved on rails. The depression seemed to ease in the final quarter of 1920 but economic conditions really hit the skids in the first half of 1921.
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In November, 1920, the N.Y. Times remarked that the contraction was orderly and without widespread panic despite the substantial fall in the stock market and agricultural commodities. Financial distress was mainly confined to the small farm-sector banks. A Federal Reserve official remarked that the process of squeezing the wartime excess out of wages and prices had just begun.
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Economic policy debate:

Pressure to relax Federal Reserve policy was already coming from myriad directions.
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That government should actively manage the economy to prevent periods of hardship was a growing theme.

Comptroller of the Currency John S. Williams shifted into opposition to Fed policy in the last few months of 1920. As comptroller, he was a member of the Federal Reserve Board. He emphasized the active role that the government had often played in past economic crises and the "war socialism" of the Wilson administration.
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That government should actively manage the economy to prevent periods of hardship was a growing theme. Gold and other eligible collateral was pouring into the Federal Reserve System removing any threat to the System's reserves.
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Williams emphasized the widespread distress in southern and western agricultural areas. He had ordered the banks under his supervision to forbear on legal collection activities against "honest debtors" "wherever practicable." Abstract banking principles must not be permitted to cause such widespread real catastrophe.
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Williams was perhaps the most persistent critic of the Federal Reserve System both while comptroller of the currency in the Wilson administration and after he was replace by a Harding appointee. His numerous and voluminous letters hinted that he already believed that some financial institutions must be considered too-big-to-fail. As comptroller, he had stepped in to save the U.S. Trust Co. of Washington, D.C. in 1913. However, he couldn't get other Wilson or Harding administration officials to accept his views.
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By December, even the major Wall Street banks were showing signs of distress. Williams emphasized the degree to which Wall Street was sucking credit away from the rest of the country, and the suspect banking practices at Chase Bank, among others.
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The Board viewed a "continuing, drastic and perhaps violent rollback in prices, and therefore in wages, [as] the way forward."

Federal Reserve Board governor W.P.G. Harding (no relation to Pres. Harding) countered that allowing inflation to continue would inevitably lead to even greater financial disaster. The economic contraction was the inevitable result of wartime inflation. It was "sharp" and "painful," but the Federal Reserve interest rate increase has "prevented one of the greatest financial cataclysms of modern times."
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Harding closed pointedly by reminding Williams that the practices of the Wall Street banks that he complained about were under the primary regulation of Williams as comptroller. We "wonder why it is that your examiners did not discover and report these conditions at an earlier date."
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The author points out that, while Williams continued to lambaste the Federal Reserve and issue dire warnings of the condition of major banks and trust companies, his final report as comptroller in March, 1921, accepted the astounding collapse of values to that time as "inevitable" and remedial. "The country is now in many respects on a sounder basis economically than it has been for years." He proudly reported that, of the banks under his supervision, only five small banks had failed in the last year, which was the first full year of the depression. This was the best year for the national bank system in the 57 years of its history.
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With the comptroller of the currency on board, it seemed that there was no longer active dissent on the Federal Reserve Board. The Board viewed a "continuing, drastic and perhaps violent rollback in prices, and therefore in wages, [as] the way forward."

"As there would - certainly - be no change in the gold value of a dollar, the burden of adjustment would have to fall on those who earned the dollars, owed them, loaned them or saved them. There was, however, one signal difference in this particular episode of postwar readjustment. No financial panic was in the cards: The Federal Reserve had seen to that."

Keynes pointed out that, since modern business was "largely carried on with borrowed money," monetary deflation was now more destructive than monetary inflation.

Strong testified that the economy had already entered the recovery cycle that the Fed interest rate policy was designed to ultimately bring about.

Wheat broke $1 per bushel, falling to 93¢ in November, 1921. Wheat falling below $1 was a standard bear signal on Wall Street running well back into the 19th century. In the nine months prior to June, 1921, the Bureau of Labor Statistics price scale dropped 34% from 225 to 148. Liquidation and deflation had been extensive but orderly. "But the suicide rate had reportedly increased fourfold by the first half of 1921."
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John M. Keynes pointed out that, since modern business was "largely carried on with borrowed money," a deflationary Federal Reserve policy had to stop the economy cold. Monetary deflation, he argued, was now more destructive than monetary inflation.
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Testifying before Congress in August, 1921, Harding kept maintaining the System's untenable position that the contraction was due to market conditions unrelated to Fed policy, but he somewhat inconsistently accepted the suggestion that the contraction would have been far less severe if initiated earlier.
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Strong was unrepentant and accurate. Economic gloom had reached its high point, but Strong testified that the economy had already entered the recovery cycle that the Fed interest rate policy was designed to ultimately bring about. It was in fact just as he hade always expected, and apparently at that moment, beyond the understanding of his political, business and economist critics.
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The presidential campaigns leading to the November 1920 election seemed oblivious to the fact that the nation was already in recession, although the commodity and stock market declines dated from 10 to 12 months prior to the election. By August 1920, cattle, shoe leather, rye, sulfuric acid, structural steel beams, flooring pine, common brick and newsprint had joined the commodities decline. However, mostly, the campaigns focused on other concerns.
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Both parties voiced earnest support for the gold value of the dollar. Both presidential candidates supported balanced federal budgets and a smaller federal government. It was still the economic problems caused by wartime inflation, which was still in evidence until midway into 1920, that drew most of the economic attention, such as it was. The League of Nations and the Treaty of Versailles were far more prominent concerns of the literati - but not of ordinary Americans. Warren Harding, the quintessence of normalcy, won in a landslide, as did the entire Republican ticket.
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The new Harding administration pledged to get the government's financial affairs in order with reduced spending and balanced budgets.

With the depression plunging at its most vicious pace, the new Harding administration pledged to get the government's financial affairs in order with reduced spending and balanced budgets. Expenditures were reduced from $5.1 billion to $3.3 billion. Already in surplus under Wilson's last budget, the surplus increased from $291 million in 1921 to $736 million in 1922. The budget cutting was facilitated by the Washington Naval Conference of November, 1921, by which the Harding administration reduced the burdens of a naval arms race.
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Harding forthrightly opposed veterans bonus legislation. He argued that the restoration of economic prosperity was the primary need of the unemployed, and that tax cuts and budget reductions were the most important means to that end. The present difficulties were the natural outcome of wartime financial excesses and economic disruptions and would end with suitable if inevitably painful market adjustments.
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Both in the ending Wilson administration and the new Harding administration, mainstream political officials waited for the markets to finish their brutal work of readjusting from the inflationary economic distortions of the Great War.

Treasury Secretary Andrew W. Mellon, a wealthy banker and industrialist, was an enthusiastic supporter of the Harding program. Shrink tax rates, interest rates and public spending, he urged.
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"Fatalism was the bipartisan attitude towards the depression," Grant points out. Both in the ending Wilson administration and the new Harding administration, mainstream political officials waited for the markets to finish their brutal work of readjusting from the inflationary economic distortions of the Great War.
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However, there was carnage in the agricultural sector as European agriculture recovered and exports to Europe sharply declined. Harding supported help for agricultural financial needs, resulting in the 1923 Agricultural Credits Act creating a dozen farm intermediate credit banks that today exist as the Federal Farm Credit Banks.
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Commerce Secretary Herbert Hoover, wealthy philanthropist and undertaker of massive war-related relief projects, deplored the suffering but agreed with the government's overall approach. He viewed those urging government activist intervention with respect to wages or commodities, among other things, as full of crackpot ideas.

"Hoover would go only so far in advocating for government action. Deflation was a tribulation, but a necessary and constructive one, [he told some real estate businessmen]. Booms did more than precede busts; to a degree, they caused them. It was during the champagne-and-confetti phase of the business cycle 'that we speculate, over-extend our liabilities, slacken down in effort, lower our efficiency, waste our surplus in riotous living instead of creation of new capital, drive our prices to vicious levels, lose our moral and business balance.' The comeuppance phase of the cycle was therefore unavoidable. Though some would resist it, said Hoover, everyone would 'have to come into the cold water in the end.'"

Wage rates had apparently dropped by about 50% from wartime highs.

Market interest rates began declining in May, 1920. As a member of the Federal Reserve Board, Mellon began urging interest rate reductions in the April 4 meeting. The 7% rate was widely abandoned. It was lowered to 6.5% in New York and 6% elsewhere. Strong reluctantly went along with the rate reduction. The Bank of England similarly reduced its discount rate that April. Treasury refinancing operations were received very well by the markets that June, and considerable loan sums were actually paid off.
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The giant U.S. Steel Corp. suffered price, wage, employment and profit declines but managed to weather the contraction with relatively little damage. Its share price declined 34.3% compared to 46.6% for the Dow and declines of well over 50% for the independent steel producers. The Dow railroad index hit its low point for the cycle at 65.52 on June 20, 2021, its lowest point since 1898. Aside from the economic contraction, railroads were still staggering from government mismanagement during the war.
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Guesstimates of unemployment varied widely, but that there was plenty of it was obvious. Wage rates had apparently dropped by about 50% from wartime highs. By the middle of 1921, there were riots in Europe and increasing agitation in the U.S. That the business cycle had already bottomed out and begun to recover was as yet not perceptible.
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Economic revival:

The economic turn came in the summer of 1921; the market hit its bottom in the third week of August.
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The Harding administration responded energetically at this point, as politicians generally do, with a conference of the good and great to study the unemployment problem. Grant points to Hoover as the author of the conference, which Hoover named the "President's Conference on Unemployment." It began on September 26, 1921.

"For Hoover, the conference was to be no mere temporary gathering of experts, but a long-range project to attack unemployment by ironing out the business cycle. As best as Hoover's panel of experts could determine, there were 3.5 million unemployed (nothing close to the 5.5 million that some had claimed). To help these unfortunates get through the winter, a targeted plan of public works spending was in order. Cities and states would bear its financial burden. The federal government would neither command nor spend but rather cajole and coordinate. For the long run, there was a crying need for better economic statistics; this the Department of Commerce could and would supply."

Beyond that, the heavy lifting of economic recovery could be left to the markets, even then resiliently surging back from the depths.
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Attitudes towards unemployment varied along expectable lines. Government emergency relief was considered the appropriate role of cities, counties and states and private charities, not the federal government. Capital spending projects for roads and other infrastructure could be pushed forward.
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One result was the November enactment of a $76.4 million highway bill directly creating an estimated 150,000 jobs. There was a surge in tax exempt municipal bonds in the next nine months, indicating that the conference had had a real impact. A contentious tax bill was signed in November, 1921, generally rolling back some of the wartime taxes. However, tariffs were raised.

This marked the onset of the trade war that would destroy prosperity worldwide in the next decade. See, Blatt, "Understanding the Great Depression and the Modern Business Cycle," and Great Depression Summaries of Controversies and Facts at Part I, "Causes and Cures."

Demands for government relief resulted in a political response that mitigated the degree to which wages declined in England.

The depression in England was in many respects similar to that in the U.S. However, demands for government relief resulted in a political response that mitigated the degree to which wages declined in England. Accordingly, Grant states, England continued to suffer deflationary pressures throughout the 1920s.

"The 'liquidation of labor' turned out to be a paradoxical secret of American success. Wage rates had fallen - evidently far enough to make industry profitable again. Optimists resumed hiring first. Realists followed - simply to compete, they had to pay market wages, or higher than market wages, to attract the better cut of employee. By and by, the 1920s roared."

Grant is afflicted by more than a little confirmation bias here. England's rigid labor markets were not the only, or even the most important, reason for the differences. The residual financial impacts of the Great War were infinitely harsher for England and the rest of Europe, and the 1920s trade war initiated by the U.S. with the Fordney-McCumber Tariff of 1922 would crush most European efforts to restore financial stability during the 1920s.

Inevitably, a major bank, the Guarantee Trust of N.Y., was found to be overextended and in serious trouble. The Harding administration and the Harding Federal Reserve Board (the two Hardings were not relatives) were unmoved. Instead, J.P. Morgan & Co. organized a bankers' syndicate to furnish perhaps $80 million in new investment, enabling the troubled bank to successfully unwind its suspect positions.
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The gold flow into the U.S. reached major proportions as a result of a substantial surplus in the balance of payments and payments to the U.S. on the massive war loans extended during the war to the European allies. While Federal Reserve notes had been backed by little more than the required gold reserve of 40% in the summer of 1920, by May of 1921 its notes were backed by 80%. At the N.Y. Fed, the gold backing was 100%. The Federal Reserve System's gold stock rose by $400 million to $3 billion by July, 1921, and another billion by the end of 1923. This vast gold hoard provided the monetary fuel for the roaring 1920s.
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The carnage among southern cotton growers was substantial, and southern politicians vented their ire at the Federal Reserve System.

The decline had been precipitous, and the recovery was spectacular. By 1922, prices, wages, employment and production were all substantially above 1921 levels.

Commodity prices were in a broad revival by midsummer 1921. Cotton recouped a third of its losses in just 90 days. However, the carnage among southern cotton growers was substantial, and southern politicians vented their ire at the Federal Reserve System.
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The decline had been precipitous, and the recovery was spectacular. By 1922, prices, wages, employment and production were all substantially above 1921 levels. There was an immediate boom in residential construction. Inventory management had been a major factor.

"On the way up, inventory accumulation had contributed to the panicky sense that the world was running out of everything. On the way down, inventory destocking helped to enflame the fear that the world was oversupplied with everything."

War prosperity had been exaggerated by profits due to the rising prices of goods in inventory. Inventory liquidation had to run its course, as it had by mid 1922. The write-down of inventory values was a major contributor to manufacturing losses in 1921, and the completion of inventory liquidation was a major factor in the revival of profitable operations.
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Perhaps due to the speed of both the decline and the recovery, there was little financial disruption. Only 28 small nationally chartered banks failed in the twelve months to June 1921. There were few failures among corporations with capitalization of $250,000 or more. The carnage was among the small state chartered rural banks. Small, heavily indebted farmers were falling by the wayside as export markets shrank and the more prosperous farmers mechanized.

"In the way of all mass financial movements, this one would carry at least a little too far. Come the return of prosperity, penny pinching managements would discover the need to restock depleted shelves. They would discover, too, that they were shorthanded. And so the deflationary process - - - would swing into reverse. It was bound to happen - it always had happened - though no one could be certain when it would start."

While the recovery in wages was slow, the decline in wages for those who had kept their jobs was far less than the decline in consumer prices.

The depression had set the stage for vigorous recovery. Just at the time the blood was flowing down Wall Street, there were mouthwatering bargains for those who had maintained liquid assets. The Wall Street Journal and a perceptive host of business and financial leaders were leading an optimistic chorus within a month of the August 1921 market bottom.
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Prices had been driven down to and well below normal levels, and the productivity of American industry was soaring. Interest rates were low, depleted inventories had to be replenished, assets were available cheap, labor was available at low wage rates, exports were booming and gold was pouring in to the country. Grant provides details of the remarkably rapid recovery of a flexible and clearly resilient economy.
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Stock market prices duly reflected the booming prosperity of 1922 and 1923. The increase in commerce was quickly reflected in railroad statistics.

"The fact was that in just about every branch of American business and finance - agriculture was the large and troublesome exception - things were humming."

The fact was that, by 1923, farm income was running 50% above prewar levels - but the small farmer who could not mechanize was not included in the party.

Overall manufacturing in 1922 matched the volume of 1920. While the recovery in wages was slow, the decline in wages for those who had kept their jobs was far less than the decline in consumer prices.
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Grant emphasizes the importance of confidence. Harding's rejection of the veterans bonus bill indicated that this administration would not be throwing federal money at every politically popular proposal. "Americans believed in themselves and in the future."

"They believed that the federal finances would be capably managed, the public debt paid down and the weight of taxes lifted."

"The depression, though painful, was not pointless. It had rebalanced costs and prices and exposed the investment errors of the boom. There had been no 'liquidity trap,' no 'secular stagnation,' as the 1930s presently brought. From peak to trough, a year and a half had elapsed."

Once again, there had indeed been a self-healing depression in the American economy. The economic contraction had been brought to a rapid close and succeeded by rapid renewal of growth without any major intervention from the federal government.

"There had been a great inflation and a great deflation. There had been high unemployment, commercial distress and an agricultural crisis. But there had been no general panic and no depletion of the public treasury. There had been no devaluation of the dollar. The depression, though painful, was not pointless. It had rebalanced costs and prices and exposed the investment errors of the boom. There had been no 'liquidity trap,' no 'secular stagnation,' as the 1930s presently brought. From peak to trough, a year and a half had elapsed. It was a relatively expeditious slump."\

Administered stabilization:

The speed of the adjustment process was due to the unhindered functioning of market pricing mechanisms and wage flexibility, Grant emphasizes. However, the pain had been very real, and Fisher and Keynes proposed instead that price and wage stabilization through central bank monetary policy would be a far superior course.
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Small farmers and their savings banks remained vulnerable as agriculture mechanized and increased production without them.

The Federal Reserve System increasingly pioneered activist open market operations by buying and selling government securities in efforts to initiate desired pricing results.

Instead of being governed by market mechanisms, the administered alternative of monetary manipulation would govern an index of prices." "Mandarin rule was the new idea."

The interventionist policy began receiving considerable political support, especially among farm sector politicians. The farm sector suffered the worst and longest. Small farmers and their savings banks remained vulnerable as agriculture mechanized and increased production without them.

"Fisher threw his considerable intellectual weight behind the proposal. 'The present generation,' the professor testified before the House Banking Committee in 1923, 'is witnessing the most stupendous fluctuations in the purchasing power of money in the whole history of this long-suffering world. Never before have such fluctuations been so wide, so universal, so diverse or so long continued. For years to come the problem of the instability of money will continue to engage the attention of economists, businessmen and statesmen. - - - The need of our time is stabilization.'"

Benjamin Strong at the N.Y. Fed dismissed these ideas as "bound to lead to confusion, heartburn and headache." The job of the Federal Reserve did not include economic costs. "Our job is credit," he insisted. Nevertheless, as the 1920s proceeded, the Federal Reserve System increasingly pioneered activist open market operations by buying and selling government securities in efforts to initiate desired pricing results. See, Meltzer, History of Federal Reserve, vol. I (1913-1963, Part II, "The Engine of Deflation (1923-1933)," at Part F, "The Search for an Administered Alternative."
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Instead of being governed by market mechanisms, the administered alternative of Federal Reserve monetary manipulation would govern an index of prices. "Mandarin rule was the new idea," Grant asserts. It would be "governance by economists."
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The Federal Reserve was increasingly intervening with its administered alternative to the money markets. "It was an artificial stability."

In Europe, administered alternatives to market mechanisms were not working well. Rigid wage, employment, and pricing markets were accompanied by chronic levels of high unemployment. In the U.S., which retained flexible product and labor markets, prosperity expanded exuberantly through the 1920s. While prices rose only 0.7% per year, real wages rose by 2.1% per year. However, the Federal Reserve was increasingly intervening with its administered alternative to the money markets.

"It was an artificial stability. In the late 19th century, prices had actually fallen in response to innovation. As it cost less to make things, so it cost less to buy them. There was no such technological dividend for the consumers of the 1920s."

The activist Federal Reserve had succeeded in maintaining price stability. Unfortunately, it was at the expense of a great inflation of asset prices. Stabilization was not working in the markets for capital investment, real estate and common stock.

By 1927, Federal Reserve suppression of interest rates resulted in a great increase in leverage and an economic and stock market boom over which the Federal Reserve totally lost control. The activist Federal Reserve had succeeded in maintaining price stability. Unfortunately, it was at the expense of a great inflation of asset prices. Stabilization was not working in the markets for capital investment, real estate and common stock.

Asset price inflation is real inflation and a dangerously destabilizing factor, as succeeding booms and busts have amply proven. However, no matter how often the experiment in economic stabilization fails, the Federal Reserve appears intent on repeating it - one of the classic definitions of madness.

Grant compares the 1920-1921 depression with the Great Depression. He concludes that, despite the policy failures involved in the postwar boom and bust, the 1920-1921 depression was a success.

"There had been a war-induced, economy-crippling inflation. The central bankers chose to precipitate -- or, at least, not to try to prevent -- a synchronous, dislocating deflation. Wholesale prices fell by 20 percent within two years. Recovery ensued.
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"Came the 1929 Crash and the price level fell by an almost identical 20 percent in two years. No recovery ensued, though financial conditions were in some key respects less rugged than in 1920-1921. Thus, in the Wilson-Harding depression, interest rates were higher and the burden of private debt was heavier than either was in 1929-1931. Why wasn't the 1920-1921 affair just as terribly 'great' as the one that enveloped Herbert Hoover?"

"Whereas 92 percent of reporting firms had reduced wages in 1921, only 7 percent did so in 1930." However, recovery was vigorous after 1921, while depression continued until the end of the 1930s.

The prevention of wage reductions was the primary objective of the Hoover response. The burden of the decline must fall elsewhere, not on labor. The policy was a success. "Whereas 92 percent of reporting firms had reduced wages in 1921, only 7 percent did so in 1930." However, recovery was vigorous after 1921, while depression continued until the end of the 1930s.
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While the depression decline was sharp and short in 1920-1921, the depression decline developed slowly until the summer of 1930. It thereafter plunged much farther and for a much longer time during the 1930s than in 1920-1921.
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Labor was a cost, like any other cost. If wages don't come down, head counts or working time would.

The failure of Hoover stabilization policy was accurately predicted by Yale economist James Harvey Rogers. "Price stabilization would paradoxically prove destabilizing." Labor was a cost, like any other cost. If wages don't come down, head counts or working time would.

"To avoid insolvency, [businesses] would certainly order layoffs or dismissals. While a fortunate few employees earned high wages, others would earn nothing."

Hoover's energetic stabilization efforts bear much of the blame, according to recent analysis by UCLA economist Lee E. Ohanian

"Determined to shift the burden of economic suffering to capital, the humanitarian unwittingly precipitated suffering enough for capital and labor. In 1920 and 1921, nominal wages fell as prices fell. There was no such adjustment in 1929, 1930 and 1931. 'By late 1931,' as Ohanian observed, 'real manufacturing average hourly earnings had increased more than 10 percent as a consequence of the Hoover program and deflation. By September 1931, manufacturing hours worked had declined more than 40 percent, and the average workweek in manufacturing had declined by about 20 percent.'"

The price and labor market flexibility of 1920-1921 kept that depression short and provided the basis for rapid recovery, Grant explains. A decade later, the result was much different. "[The] end result of what was probably the greatest price-stabilization experiment in history proved to be, simply, the greatest and worst depression," concluded a 1937 postmortem of the Depression.

Clearly missing from Grant's analysis as from so many others on these subjects is the obvious roles of the 1922 and 1930 tariffs and the resulting trade war during the 1920s and 1930s and the collapse of U.S. export markets beginning at various points in 1929 and 1930, coming on top of the economic and financial aftereffects of the Great War. See, seven Great Depression Chronology series articles beginning with Descent into the Depths (1929): The Great Depression Crash of '29.

"What we can observe, even at this great distance of years, is that the price mechanism worked more freely in 1920-1921 than it was allowed to do in 1929-1933."

The Fed is now once again experimenting with long periods of interest rate suppression, the result of which is increasingly distorted economic and financial flows and the rising of a mountain of debt worldwide.

It is not the resilience of capitalism that is at issue, but the resilience of modern capitalist systems increasingly fettered with tsunami waves of regulation and the budgetary burdens of modern political economy policies.

Grant candidly recognizes the analytical difficulty.

"There are no controlled experiments in economics. No one living through the Great Depression could be exactly sure how to apportion blame among domestic and foreign causes. Still less can posterity be certain. What we can observe, even at this great distance of years, is that the price mechanism worked more freely in 1920-1921 than it was allowed to do in 1929-1933."

The Fed's efforts at Keynesian-style stabilization have repeatedly increased in scope and vigor, with results that include the Great Depression decade of the 1930s, the Great Inflation decade of the 1970s, and the two boom-and-bust cycles of the first 15 years of the 21st century. There were, of course, other major factors involved, but the Keynesian assertion that the artificially low interest rates didn't play any role in the booms that preceded the busts is clearly absurd. The Fed is now once again experimenting with long periods of interest rate suppression, the result of which is increasingly distorted economic and financial flows and the rising of a mountain of debt worldwide.
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Is the mountain volcanic? Numerous other central banks are also pumping money into the magma chamber.
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This will not end well!
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The Keynesians take credit for preventing the Great Recession from developing into another Great Depression. In essence, they claim that there is no natural resilience in the economy and that recovery is not possible without energetic expansion of budget deficits, monetary inflation and interest rate suppression. As stated above, they resemble the pagan priests who asserted that their rituals saved the sun from totally disappearing each winter.
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The counterfactual is, of course, difficult to prove. Indeed, it is not the resilience of capitalism that is at issue, but the resilience of modern capitalist systems increasingly fettered with increasingly rigid markets, tsunami waves of regulation and the budgetary burdens of modern political economy policies.
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What is indisputable is how far Keynesian ambitions and promises have fallen. When Keynesians began to influence policy in the 1960s, they asserted with near scientific certitude their ability to increase the pace of economic expansion by a half a percentage point, and maybe even by a full percentage point. Compounded over time, either of these would truly have been vast accomplishments. They now have lowered the bar for success so low that only if the economy dove to the depths of the Great Depression would they admit failure.