The Forgotten Depression: 1921: The Crash That Cured Itself - Hardcover

Grant, James

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9781451686456: The Forgotten Depression: 1921: The Crash That Cured Itself

Hardcover

ISBN 10: 1451686455 ISBN 13: 9781451686456

Publisher: Simon & Schuster, 2014

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By the publisher of the prestigious Grant’s Interest Rate Observer, an account of the deep economic slump of 1920–21 that proposes, with respect to federal intervention, “less is more.” This is a free-market rejoinder to the Keynesian stimulus applied by Bush and Obama to the 2007–09 recession, in whose aftereffects, Grant asserts, the nation still toils.

James Grant tells the story of America’s last governmentally-untreated depression; relatively brief and self-correcting, it gave way to the Roaring Twenties. His book appears in the fifth year of a lackluster recovery from the overmedicated downturn of 2007–2009.

In 1920–21, Woodrow Wilson and Warren G. Harding met a deep economic slump by seeming to ignore it, implementing policies that most twenty-first century economists would call backward. Confronted with plunging prices, wages, and employment, the government balanced the budget and, through the Federal Reserve, raised interest rates. No “stimulus” was administered, and a powerful, job-filled recovery was under way by late in 1921.

In 1929, the economy once again slumped—and kept right on slumping as the Hoover administration adopted the very policies that Wilson and Harding had declined to put in place. Grant argues that well-intended federal intervention, notably the White House-led campaign to prop up industrial wages, helped to turn a bad recession into America’s worst depression. He offers the experience of the earlier depression for lessons for today and the future. This is a powerful response to the prevailing notion of how to fight recession. The enterprise system is more resilient than even its friends give it credit for being, Grant demonstrates.

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About the Author:

James Grant is the founder of Grant’s Interest Rate Observer, a leading journal on financial markets, which he has published since 1983. He is the author of seven books covering both financial history and biography. Grant’s journalism has been featured in Financial Times, The Wall Street Journal, and Foreign Affairs. He has appeared on 60 Minutes, Jim Lehrer’s News Hour, and CBS Evening News.

The Forgotten Depression 1

THE GREAT INFLATION

The coda to the murderous Great War of 1914–18 was an influenza pandemic even more lethal than the war itself. But the wounded world of 1919 could count one saving grace, at least. The oft-predicted postwar depression had failed to materialize. Quite the contrary: Business was booming.

Here was a most pleasant anomaly. History taught that peace would bring depression. Such had been the experience of America after both the War of 1812 and the Civil War. The Great War was a world war. No doubt, many reasoned, a worldwide economic adjustment would prove even more disruptive than the slumps that had followed more isolated conflicts of the past.

No template for government action to resist depressions was yet in place. Long-established economic doctrine rather favored laissez-faire. As the natural seasons turned, so did the economic ones: summer and winter, boom and bust. Individuals might prepare for the inevitable lurches to the down side—a workman might save, a farmer might market his crops in anticipation of lower prices, a banker might call in loans to brace for a depositors’ run. But from the government, not much was expected but to balance its budget, maintain a sound currency and allow business to take its natural, improving course. “[T]hough the people support the government, the government should not support the people,” declared President Grover Cleveland in vetoing a $10,000 appropriation to pay for the distribution of seed grain to drought-stricken Texas farmers in 1887.1

It was the letter of the Cleveland doctrine rather than the spirit that still prevailed in some policy-making circles. Many voices now pressed the government to intervene. “Progressive,” the speakers styled themselves, though the progress to which they aspired concerned not the management of the business cycle but redressing the supposed injustice in the distribution of income. By 1892, the Populist Party was demanding inflation of the currency, a graduated income tax, strict limitations on corporate ownership of land and the nationalization of the railroads and telephone and telegraph companies.2 By 1908, Eugene Debs was demanding a republic in which the working class governed the plutocracy, rather than the other way around. By 1910, Theodore Roosevelt, no avowed socialist, was demanding that “human welfare” be raised above “property.”3

“From the same prolific womb of governmental injustice we breed the two great classes—tramps and millionaires,” the Populists had alleged. Certainly, electrical illumination, the internal combustion engine and related marvels lightened the burden of labor and thereby liberated many from drudgery and want. But, equally, according to the composite Progressive indictment, the rich had never been richer, nor the gap between rich and poor provokingly wider.4

In the 1912 presidential election, Debs drew 6 percent of the popular vote on the Socialist ticket, the best showing by any left-wing candidate in any presidential contest before or since.5 He finished fourth.

William Howard Taft, the 300-odd-pound Republican incumbent, campaigning on the doctrine that “[a] National Government cannot create good times” (but could, through ill-advised policy, institute bad times), won a mere two states, Utah and Vermont.6 He came in third.

Theodore Roosevelt, who had bolted from the GOP to preach that government could, in fact, effect the very improvements that Taft resisted, pledged to “use the whole power of government” to resist “an unregulated and purely individualistic industrialism.”7 He placed second.

Candidate Wilson vowed to tame the “trusts,” rein in the big Wall Street banks, lower tariffs and—to compensate for lost revenue from reduced import duties—tax the rich. President Wilson, having beaten the divided GOP, proved as good as his word. By the close of his first year in office, the former president of Princeton University had presented the nation with an income tax and a central bank (in name, a kind of decentralized central bank). The federal government would never again lack the means of financing itself.

In 1916, at the end of his first term, Wilson sought a second. He was deserving on financial grounds alone, the Democratic Party platform asserted: “Our archaic banking and currency system, prolific of panic and disaster under Republican administrations—long the refuge of the money trust—has been supplanted by the Federal Reserve Act, a true democracy of credit under government control, already proved a bulwark in a world crisis, mobilizing our resources, placing abundant credit at the disposal of legitimate industry and making a currency panic impossible.” Then, too, the Democrats commended themselves for “the splendid diplomatic victories of our great president, who has preserved the vital interests of our government and its citizens and kept us out of war.”

New vistas of federal activism opened on April 6, 1917, when the president led the nation into war. As Washington drafted men, so it conscripted incomes. In House debate in 1913 over the proposed income tax, a seemingly wild-eyed Progressive had called for a schedule of rates culminating in 68 percent on incomes above $1 million. “The amendment was, of course, beaten,” reported the New York Times, the paper seeming to roll its eyes at the very notion of so confiscatory a marginal rate of taxation.8 By 1918, the Treasury was taking 77 percent of incomes above $1 million.9 The Wilson administration took control of merchant shipping, the railroads and the telegraph and telephone companies. It rationed raw materials and set ceilings on prices and wages. It intervened in labor disputes. It allocated, requisitioned and commandeered private property. It liberalized the banking rules and thereby encouraged the expansion of credit: After June 1917, a New York bank could lend 38.8 percent more against every dollar of reserve it was required to hold than before the change was enacted.10 Woodrow Wilson delivered the activist government that America’s populists and socialists had long demanded.11

So when Frank Morrison, secretary of the American Federation of Labor, warned in January 1919 that the government was the only instrument of postwar economic salvation—and that, barring federal intervention, there could be “bread lines in every industrial center before May 1”—his message had none of the shock value it would have had before the war.12 More conventionally familiar was the fatalistic voice of the Babson economic forecasting service, which predicted “a period of trouble and depression.” There was no getting around it, said the founder, Roger W. Babson: “We can prepare for reaction and prevent it from being disastrous, but to stop it is impossible.”

Right as rain did the bears initially appear to be. Within four weeks of the November 11, 1918, Armistice, the War Department had cancelled $2.5 billion of its then outstanding $6 billion in manufacturing contracts;13 for perspective, $2.5 billion represented 3.3 percent of the 1918 gross national product.14 In January 1919 commodity prices tumbled. Steel mills, which had hardly been able to keep up with war-induced demand, now operated at 60 percent to 65 percent of capacity. Order books dwindled, that of the United States Steel Corporation by 42 percent between the Armistice and May 1919. Not since the Panic of 1907 had the giant steel maker seen the likes of it.15

But the Morrisons and Babsons had failed to reckon with the long-thwarted American consumer. Purchases patriotically deferred during the year and a half of U.S. belligerency were now exuberantly rung up. War or not, Americans had continued to drive their Fords and Chevrolets and Buicks (gasoline sales never wavered during the ostensibly luxury-free duration of the conflict). Now, with the peace, the people demanded silk shirts, new cars and a little fun.

European consumers, too, were buying American, their spending power enhanced by loans funneled through their governments from the U.S. Treasury. In the five years prior to the outbreak of war in Europe in 1914, American exports had averaged $2.1 billion a year. They accelerated during the war and soared again with the peace. In 1919, they reached nearly $8 billion.16

Doomsayers could hardly believe their eyes. Surely, they reasoned, a postwar boom was a contradiction in terms. What was needed—and what was, on form, inevitable—was a bust. As with physical objects, so with prices: What goes up would have to come down. Consumer prices had risen by 11 percent in 1916, by 17 percent in 1917 and by 18.6 percent in 1918. They were on their way to rising by 13.8 percent in 1919.17

Flyaway prices were symptoms of wartime financial disorder. Immense public borrowing, and the easy money to accommodate it, may or may not have been a necessary evil, but the Armistice now rendered it unnecessary. When governments stopped printing money for the very purpose of destroying life and property—when production and orthodox banking made their welcome reappearance—come this happy day, the experts promised, prices would certainly tumble.

But prices resumed their rise as the experts reconsidered their forecasts. In early May, the Commercial and Financial Chronicle was prepared to admit to its Wall Street readership that “merchants are less timid about buying.” Before very long, the merchants were buying boldly. By the fall of 1919, plants were operating at full capacity, raw materials were unobtainable except at exorbitant prices and delivery dates were being pushed out by as much as a year.18 Come Christmas, the Chronicle’s columns were reporting that “consumption plainly outruns production; in parts of the country what might be called a Saturnalia of buying prevails; the retail holiday business is said to be the largest on record.”19

If Saturnalia it was, the inflationary boom of 1919 was a bitter and unhappy one. Wages couldn’t seem to keep pace with prices, nor prices with costs. A pair of sensible shoes had cost $3 before the war. Now they sold for $10 or $12. Bankers scornfully spoke of the shrunken “fifty-cent dollar.”20 Pensioners, judges, professors—anyone on a fixed income—suffered a crippling loss in living standards. Class rose up against class and interest group against interest group.

Especially did the great inflation set labor against management, city dwellers against farmers, creditors against debtors and the Federal Reserve against a growing legion of monetary critics. The “high cost of living”—or the more headline-suitable acronym “H.C.L.”—became the national hot button. And hovering in the background of these economic conflicts was the outbreak of revolution in Europe and the triumph of Communism in Russia. Was America next in line for a workers’ revolt? “We are going to socialize the basic industries of the United States,” vowed John Fitzpatrick, veteran president of the Chicago Federation of Labor, on September 18, 1919.21

Labor took out its anger on management, which not infrequently responded with allegations that the unions were stalking horses for the violent left. In 1919, one in five American workers was involved in a strike; it was an unprecedented figure at the time, and it has never been approached since.22 The United Mine Workers, the nation’s biggest union, struck the coal mines, and a quarter million steelworkers walked out on U.S. Steel. There was a police strike in Boston. There were strikes by machinists, iron workers, upholsterers, butchers, paper makers, boot and shoe workers, raincoat makers, oilfield hands, longshoremen, puddlers, metal polishers, carmen, waiters, garment workers, die sinkers, grain handlers, livestock handlers, silk weavers, petticoat workers, silk operatives, drop-forge men, painters, glaziers, braziers, tool makers, cigar makers, subway workers, actors, carpenters and pressmen.23 In September 1919, President Wilson, setting off on his ill-fated cross-country trip to take his case for the League of Nations directly to the people, stopped in Columbus to deliver his first speech. The crowd was disappointingly small—it seemed that the Columbus trolleymen had struck.24

Many were the local and particular grievances that pushed workers and managements to break off negotiations and mount (or suffer) a strike. One common thread was the workers’ loss of real income to sky-high prices. Another was radical politics.

The Bolshevik triumph in Russia in November 1917 electrified the American left. Here was the sign they had so long awaited. A general strike—the first in American history—shuttered Seattle for five days in January 1919. Yes, the Reds and anarchists and members of the Industrial Workers of the World—better known as Wobblies—were bound to admit, the reactionaries had cut short the people’s uprising. But what an inspiring revolt it had been.25

Still inspired, the would-be vanguard of the socialist revolution marked May Day with the mailing of 30 letter bombs to members of the American Establishment. Lacking adequate postage, most of the bombs went undelivered. Reinspired, or refinanced, the revolutionaries tried again.26 Among their targets was Wilson’s energetic and ambitious attorney general, A. Mitchell Palmer.

Late on the night of June 2, an assailant dropped a bomb near the front door of Palmer’s Washington, D.C., home. The device blew the would-be executioner to bits—he seemed to have tripped before he reached his target—but left Mr. and Mrs. Palmer physically unharmed. “Class war is on and cannot cease but with a complete victory for the international proletariat” was an excerpt from the dozens of copies of the anarchist pamphlet “Plain Words” that the bomber had not had the chance to distribute.27

Such acts of domestic violence did nothing to sweeten the relations between management and labor. Angry and fearful men glowered on either side of the bargaining table. “It might be that before we got through we would bring ...

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