A new book that claims the 1921 depression cured itself without government intervention is taking conservative readers by storm. It’s a timely topic; given that Rand Paul currently leads in Republican polls for his party’s 2016 presidential nomination, we’re probably going to hear a lot more about laissez-faire economics in the months ahead. Problem is, the book proves nothing, because its conclusion is wrong.
It’s hard to find writing abut economics you can trust. It’s a squishy subject because anyone can selectively assemble data or historical facts to “prove” anything they want to, which is what people with political agendas usually do. Scientific method requires observing before drawing conclusions; reversing this process invalidates the results. Apart from that problem numerous other writers, many with good intentions, simply get things wrong — by overlooking important factors, confusing correlation with cause, etc. In economics, there are many wrong paths, and wayward travelers go down all of them. The upshot is a lot of junk economics gets in print, and it’s hard to know what to believe.
An author’s predisposition to a conclusion, though, is a clear warning sign that he’s peddling ideology, not scientific economics. When someone sets out to prove something, and then “proves” it, you should be skeptical of what he says. That’s the problem with James Grant’s The Forgotten Depression: 1921: The Crash That Cured Itself. I haven’t read this book; it’s not available yet. The publisher plans to release it Nov. 11, the day after tomorrow. So my impressions of the book have been obtained second-hand from media reviewers who received advance copies.
Conservatives are hyping this book as “proof” that depressions will cure themselves if government leaves them alone, validating their laissez-faire ideology. As Amazon’s book description puts it, “Grant argues that [in 1929] well-intended federal intervention [by Hoover] … helped to turn a bad recession into America’s worst depression.” (Hoover isn’t often thought of as an interventionist; but he apparently was, to some extent, both in 1921 as President Harding’s commerce secretary and again in 1929 as president.) This argument contradicts the Keynesian economic theories embraced by liberals, which is bound to give the entire book a squishy partisan feel, at least for liberal-minded readers.
So far, I’ve read reviews of this book in Barrons and The Economist. Both of these publications have a conservative editorial slant, although the latter comes closer to objective journalism, and thus is more credible. Barrons unabashedly praised this book, because it says exactly what its editors want to hear, and validates what they write in their own columns. But The Economist’s editors are saying “not so fast.” They wrote,
“James Grant … has two missions: to bring this fascinating chapter of economic history back to life, and to demonstrate that a laissez-faire approach can cure slumps better than government activism managed in the 1930s — or indeed in 2008.”
So there’s the author’s bias. The Economist’s review continues,
“He is more successful in his first aim than the second.”
There’s the reviewer’s judgment. Why? Because the author overlooked an important factor:
“The Fed brought on the 1920-21 depression with high interest rates. Those rates drew in gold anew, which, along with deflation and political pressure, eventually caused the Fed to relent and lower rates. The slump and recovery were thus not the spontaneous product of the free market but of deliberate policy, much as in later recessions. ”
This completely undercuts Grant’s argument that the 1921 depression cured itself. Moreover,
“Even if Mr Grant is right that the economy emerged from depression largely unaided, it is puzzling why this should be considered a victory given the staggering economic cost ….”
This cost included 19% unemployment. Even if depressions eventually cure themselves, they cause too much human suffering to allow them to rage unabated.
Which raises the question: Who would withhold pain medication from a terminally ill cancer patient? Most likely a moralizing ideologue without feelings for other people’s suffering. Even if Grant is right about the economics, the liberal argument for responding to depressions with palliative intervention rests on humanitarian grounds, not cold-blooded economic calculations. On this issue, liberals and conservatives don’t just disagree about economic strategy; they are arguing from sharply different frames of reference and values. That’s not an argument that can be settled with statistics or graphs.
The publisher of this book is Simon and Schuster, not a rightwing imprint. This reflects Grant’s status, established by several previous books, as a popular financial writer, in the same sense that Ann Rule is a popular crime writer. (He also writes a popular financial newsletter.) What Grant isn’t is an academician. This book was written for a popular audience. It wasn’t researched and written with the rigor of a serious historian or economist. Thus, if you decide to read it, you should expect to be entertained, not educated.