A Keynesian Postscript on the Bright and Shining, Dearly Beloved, Depression of 1920-21

In his latest blog post Paul Krugman drew my attention to Keynes’s essay The Great Slump of 1930. In describing the enormity of the 1930 slump, Keynes properly compared the severity of the 1930 slump with the 1920-21 episode, noting that the price decline in 1920-21 was of a similar magnitude to that of 1930. James Grant, in his book on the Greatest Depression, argues that the Greatest Depression was so outstanding, because, in contrast to the Great Depression, there was no attempt by the government in 1920-21 to cushion the blow. Instead, the powers that be just stood back and let the devil take the hindmost.

Keynes had a different take on the difference between the Greatest Depression and the Great Depression:

First of all, the extreme violence of the slump is to be noticed. In the three leading industrial countries of the world—the United States, Great Britain, and Germany—10,000,000 workers stand idle. There is scarcely an important industry anywhere earning enough profit to make it expand—which is the test of progress. At the same time, in the countries of primary production the output of mining and of agriculture is selling, in the case of almost every important commodity, at a price which, for many or for the majority of producers, does not cover its cost. In 1921, when prices fell as heavily, the fall was from a boom level at which producers were making abnormal profits; and there is no example in modern history of so great and rapid a fall of prices from a normal figure as has occurred in the past year. Hence the magnitude of the catastrophe.

In diagnosing what went wrong in the Great Depression, Keynes largely, though not entirely, missed the most important cause of the catastrophe, the appreciation of gold caused by the attempt to restore an international gold standard without a means by which to control the monetary demand for gold of the world’s central banks — most notoriously, the insane Bank of France. Keynes should have paid more attention to Hawtrey and Cassel than he did. But Keynes was absolutely on target in explaining why the world more easily absorbed and recovered from a 40% deflation in 1920-21 than it was able to do in 1929-33.

3 Responses to “A Keynesian Postscript on the Bright and Shining, Dearly Beloved, Depression of 1920-21”


  1. 1 markcancellieri February 6, 2015 at 3:38 am

    The one thing that I find interesting about the Great Depression is that total federal, state, and local government spending *surged* from 1929 to 1932 at the same time that we were sliding into a deep depression. Meanwhile, Keynesians are still trying to convince us that the problem is that we did nothing until 1932.

    http://www.madcapitalist.com/austerity-in-america/

  2. 2 sdfc February 9, 2015 at 3:10 am

    Hate to burst your bubble Mark, but there was no surge in government spending from 1929 to 1932. The rise in spending as a % of GDP was mainly driven by the slump in GDP.

    Tax receipts also surged as a % of GDP for the same reason, leaving the deficit as two parts of stuff all given the huge drop in national income. Rowdy Ronnie Reagan ran bigger deficits than Hoover.

  3. 3 Brad Bloomer April 3, 2015 at 8:17 pm

    “. . . the most important cause of the catastrophe, the appreciation of gold caused by. . .” I would submit that gold does not appreciate (or depreciate). It is simply the standard against which paper currencies rise or fall.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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