Conversations with Libertarians - Part 3

The depression/recession of 1920-21.  You probably don't remember that one, being all consumed with concern and anger about the most recent crisis, but it's apparently an important one in the minds of Libertarians.  And I would have never thought it was an event I needed to know anything about.  How wrong I was, apparently....

My FB Libertarian buddy enlightened me: You should read his book on the subject. He talks a lot about the recession in 1922?   No one remembers it because it was sharp and very little government intervention was taken so people sorted it out in six months, without government.

It's not my natural proclivity to pass up instructional moments, for me or anyone else (must be a professional instinct), so with a few keystrokes I was able to review some relevant material.  What I found seemed at some variance with what I'd been told.

First, I discovered that these notions of "short" [sharp?] and "without government intervention" are the views of the so-called Austrian school, who claim that such recessions can end quickly and without government intervention.  The ubiquitous Mr Woods seems to have cast his lot with this bunch.  Quelle surprise.  Not surprisingly, there are economists who disagree with such simplistic notions. and I quote some of their points below.  However, in brief, I found:

1) The recession wasn't particularly "sharp".  It lasted from January 1920 to July 1921 (18 months) and is considered about medium-length as recessions go.

2) There WAS government intervention.  The USA changed presidents (from Wilson to Harding), the tax base was expanded and the Fed lowered the discount rate.  That certainly seemed like government intervention to me and I said as much when I posted back.

My Libertarian buddy was not swayed by this one little bit.  Amid the flurry of exchanged views, the main contention remained:  Yes but compare it to every recession since and we see that it was over faster because of less government meddling. The recession was caused by government intervention as well.

It was my turn to be unconvinced, so I passed on some alternative economic views on the matter: The recession lasted from January 1920 to July 1921, or for a period of 18 months. This was a long recession by the standards of the post-1945 US business cycle, where the average duration of US recessions was just 11 months. The average duration of recessions in peacetime from 1854 to 1919 was 22 months, and the average duration of recessions from 1919 to 1945 was 18 months (Knoop 2010: 13). Therefore the recession of 1920–1921 was not even short by contemporary standards: it was of average length.

And then there is this little matter: The US economy in fact had significant government intervention in 1921: it had a central bank changing interest rates. The Fed lowered rates and had a role in ending this recession: in April and May 1921, Federal Reserve member banks dropped their rates to 6.5% or 6%. In November 1921, there were further falls in discount rates: rates fell to 4.5% in the Boston, Philadelphia, New York, and to 5% or 5.5% in other reserve banks (D’Arista 1994: 62). By June 1922, the discount rate was lowered again to 4%, and the recovery gained momentum.

There were other points, but you get the picture.  My local Libertarian continued with the central theme, however: The way they measure what is a depression has changed and is arbitrary anyway. The point is intervention is the cause of the bubble/bust and ongoing depression. Laissez faire will solve and prevent the business cycle.

 The issue remains unresolved.