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George Selgin on the Depression of 1920-21

Although I recently purchased James Grant’s new book, The Forgotten Depression, I haven’t yet read it.  George Selgin has.  George has also read many of the criticisms, by Paul Krugman and others, of Grant’s book.  George finds these criticisms to be off-base, especially because they mis-read Fed policy during this ‘forgotten depression.’  A slice:

As you can see from the chart, although there was some increase in “bills discounted” in response to the Fed’s lowering of its discount rate, the increase was slight compare to the massive decline in total Fed non-gold assets since 1920. What’s more, it was more-or-less perfectly–and by implication quite intentionally–offset or “sterilized” by means of Fed sales of government securities. The Fed’s contribution to recovery, in short, consisted, not of any actual monetary stimulus, but of a mere cessation of what had been a precipitous decline in its interest-earning asset holdings.

This isn’t to say that monetary expansion played no part in the post-1921 recovery. In fact, it played a significant part. But the expansion that took place was due solely to gold inflows, which were themselves encouraged by relatively high interest rates as well as by falling prices–that is, by the normal working of the price mechanism rather than by activist Fed policy. (In the 30s as well, by the way, such recovery as took place was entirely the result not of Fed easing–or of fiscal stimulus–but of the dollar’s devaluation and consequent gold inflows from Europe.) That such gold flows (as opposed to Fed easing) contributed to the post-1921 recovery is itself a fact that Jim Grant readily acknowledges; his book’s 17th chapter is called “Gold Pours into America.”