Jim Grant’s 2015 Hayek Lecture “The Forgotten Depression” via Grant’s Interest Rate Observer

The editor of Grant’s, whose “The Forgotten Depression: 1921, the Crash that Cured Itself,” won the 2015 Hayek Prize, delivered the associated Hayek Prize Lecture on June 2 in New York. The text of his remarks follow.

2015 Hayek Lecture The Forgotten Depression

This is the thing that generally happens in heaven. I thank the Manhattan Institute and the Hayek Prize jurors. I thank George Selgin, who graciously wrote a letter to place the book in nomination. And I thank Tom Smith, the Hayek Prize financier. My book and I couldn’t be happier.

Once upon a time in the early 20th century, there was a deflationary depression. Unemployment reached the double digits, farm incomes collapsed, industrial production plunged and the Dow Jones Industrial Average was nearly sawed in half. From peak to trough, America’s last governmentally unmedicated business-cycle downturn spanned 18 months.
The question before the house is why it ever ended. The fiscal response to the crisis was a balanced budget. The monetary response was high interest rates—punishingly high even in nominal terms. Yet, as I say, the depression ended. It was Hayek’s price mechanism—Adam Smith’s invisible hand—that performed the economic healing.

My mission this evening is, first, to describe what happened during the final year of Woodrow Wilson’s administration and the opening months of Warren G. Harding’s, and, second, to relate those long-ago occurrences to the present day. Conscientious historians are at pains to separate present and past—to block out the attitudes and prejudices of the moment from their perception of yesteryear’s events. I confess that I undertook this project in response to contemporary events. In 2008, the Great Depression of the 1930s monopolized the market in historical analogy. Policymakers constantly invoked the 1930s with reference to the crisis of the mangled mortgages and combusting banks. No intervention was too great to forestall a repeat of that calamity, they said. Thus, the drive to “stimulate”—to print money and to spend it. We are still being stimulated seven years after the trouble started.

As far as I know, not one senior policymaker invoked the 1920-21 affair on the other side of the stimulus argument. You may say—many have said—that 1921 was a long time ago. So was 1931. And you may observe that the world has changed since 1921—as it has since 1931. I submit that, in respect of the study of economic history, the 1920s are just as deserving as the decade that followed them. As Amity Shlaes reminds us, the 1930s did no honor to American public policy. Monetary manipulation, heavy taxation, punitive regulation, public works spending and persistently low interest rates failed to restore the Harding-Coolidge prosperity. So I turned my attention to the decade that roared.
They say that the past is a foreign country. In monetary, banking and regulatory arrangements, the 1920s seem especially alien. Ninety-five years ago, the dollar was defined as a weight of gold and the shareholders of a nationally-chartered bank were responsible for the solvency of the institution in which they owned a fractional interest—which is to say, if the bank failed they got a capital call. This sword of Damocles was called double liability. Patterns of thought and speech were likewise different from today’s. The abstraction that we moderns call “the economy” had not yet been conceived. People spoke of good times and bad, of boom and bust, but not yet of a macroeconomic whole to be observed, much less to be managed.

In the 1960s, John Cowperthwaite, British governor of Hong Kong, refused to allow the collection of economic statistics lest the bureaucrats misappropriate that information in the service of governmental macroeconomic manipulation (the very word “statistics” derives from “the state”). Wilson and Harding had precious few statistics at their disposal, even if they were inclined to implement the cyclcial policies that were yet uninvented. So ill lit was the economic landscape that the Republican Party seemed unaware that a depression was in progress when it convened in June 1920 to nominate Warren G. Harding as its presidential candidate. At least, the platform writers neglected to mention “the economy” in their list of charges against the incumbent Wilson administration. “Economy in government” was the only context in which the GOP chose to employ the “e” word. Business activity had peaked five months earlier, in January 1920.

James Grant The Forgotten Depression

The Forgotten Depression: 1921, the Crash that Cured Itself by James Grant

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