OPINION:
Janet Yellen, the chairman of the Federal Reserve, has announced at last an end to something called Quantitative Easing. This monetary expansion program has pumped trillions of dollars of new money into the financial system, basically by running the government printing presses.
Over the past six years, the Fed has flooded the economy with cash, held interest rates at historic lows and supported the federal government’s array of unprecedented bailouts and stimulus packages. Those policies combined to form one of the most aggressive responses ever to financial calamity in America.
But if history is any indication, America’s response to the Great Recession, including piling on the national debt, tinkering with the marketplace and devaluing dollars was unnecessary. It probably did more harm than good.
Americans have been taught that the Depression was made worse by President Hoover’s hands-off approach after the 1929 stock market crash set off bad things. Just in time, Franklin D. Roosevelt rode in to save the day. Deftly signing new government programs into law and creating vast federal departments, he put the American people back to work, soothing their fears with his fireside chats. That’s the narrative, anyway.
The problem with the narrative is that it ain’t necessarily so. The Depression actually continued for several more years after the inauguration of the New Deal, recovered briefly, and then descended into another sharp recession in 1938. While the Depression doesn’t prove that governments can pull economies out of crisis, an earlier economic collapse and what happened afterward indicates that the less the government does in times of economic turmoil, the better off everyone might be.
James Grant, publisher of the prestigious Grant’s Interest Rate Observer, has written a book that tells the story of “The Forgotten Depression: 1921: The Crash That Cured Itself,” Mr. Grant argues that history provides clear, empirical evidence to support the claim that government stimulus programs and monetary expansion do not help an ailing economy — and actually makes things worse.
Having entered World War I in 1917, the United States printed and borrowed heavily to finance the war. Prices at home rose dramatically, with an annual inflation rate of nearly 17 percent between 1916 and 1920. When the war ended in November 1918, and American soldiers came home, many expected a postwar deflation. However, bolstered by the easy money provided by the Federal Reserve, asset prices continued to rise, and Wall Street exploded with giddy optimism. Alas, it was not to last.
A crash in 1920 sent the stock market tumbling, with stocks losing more than half their value, and unemployment spiked from 4 percent to more than 12 percent. Industrial production fell by nearly half and gross national product lost 17 percent of value.
A combination of factors, including a stroke that felled President Woodrow Wilson, a lack of accurate economic data and the laissez-faire attitude of Warren Harding, elected later that year, led to the government doing almost nothing about it. Interest rates were allowed to rise; and wages and prices fell. The only response by Congress was a 50 percent across-the-board tax cuts for all.
Today’s liberals might be shocked to learn that this laissez-faire reaction to the economic collapse worked better than any government response has worked since. Despite a depression almost as severe as the 1929 crash, “the economy had not only recovered, but was ’roaring’ in less than 2 years,” Mr. Grant writes. In 1922, unemployment was down to 6 percent, and by 1923, it had fallen to 2.4 percent. The new, lower prices more accurately reflected the new, post-war economic reality, and on a more secure footing, the economy roared into the next decade. The 1920s would be forever remembered as “the roaring ’20s.”
Mr. Grant’s history lesson is one that all lawmakers could take to heart. The economy recovers much more quickly, with much less cost to taxpayers, if economic downturns are allowed to run their course. When the government arrives to “help,” trouble begins. This is history President Obama and Congress should have read, and heeded, before blowing $3 trillion on stimulus programs and bailouts that probably hurt more than helped.
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