Paul Krugman has recently reraised the topic of the 1920-21 Depression. It was a very deep depression but it ended quickly. Robert Murphy has an interesting response.

Some highlights of Murphy’s response. First, how he got interested in the issue:

What happened in my case is that (in the winter of 2008/09) I was doing research for my book The Politically Incorrect Guide to the Great Depression and the New Deal. I was going through the common arguments for why the 1930s depression was so awful, and I eventually realized that all of the main reasons you typically hear-often from both Keynesians and Chicago School monetarists-made no sense, because things were much much worse in each of these dimensions in 1920-1921.

Specifically, the Keynesians will say that Herbert Hoover didn’t increase federal spending enough. Monetarists will say that the Fed didn’t ease sufficiently. And both camps will say that the crushing deflation, in combination with sticky wages, led to a downward spiral in spending that caused unemployment to reach record highs.

Next, here’s what he found. These numbers are really striking:

So in reaction to those types of claims-which remember, are supposed to show us why the 1930s mushroomed into the Great Depression, yielding a decade of despair-I pointed out that in the previous depression of 1920-21:

==> Far from boosting spending, the federal government (under Wilson/Harding) slashed spending 82 percent over three years (that’s not a typo), going from $18.5 billion in Fiscal Year 1919 to $3.3 billion in FY 1922.

==> Far from easing, the Fed engaged in literally unprecedented tightening, with discount rates rising to all-time highs (since the founding of the Fed) and with the monetary base collapsing some 15 percent year/year (though that’s using the seasonally adjusted data, so some may quibble with the figure).

==> Prices fell more rapidly in one year than at any 12-month span during the Great Depression. From its peak in June 1920 the Consumer Price Index fell 15.8 percent over the next 12 months. In contrast, year-over-year price deflation never even reached 11 percent at any point during the Great Depression.

==> Far from being “rigid downward,” nominal wages fell 20 percent in a single year, according to Vedder and Gallaway.

Note that Murphy references the academic work on this issue by Daniel Kuehn, a frequent commenter on this site.