Skip to main content

Posts

Showing posts from December, 2012

The Economic Superbowl: 1920-1921 versus 1930-1931

It’s been said there’s no such thing as a controlled experiment in the social sciences, including economics.  But we had something close to a laboratory experiment back in 1920-1921 and 1930-1931.*

In each of these periods there was a depression.  Unemployment was high - for awhile, it was higher in the 1920s than in the 1930s.  Prices were falling in both periods. 

In the 1920-21 depression, the Federal Reserve Bank of New York crashed the monetary base, thereby reducing the money stock, and jacked interest rates to record highs.

In the 1930-1931 depression, the federal reserve gradually increased the monetary base and lowered the interest rate. 

In the 1920-21 period the government slashed spending and allowed nominal wages to fall.

In the 1930-31 depression the government increased spending and deficits while pressuring industrial leaders to maintain wage rates.

Tax Policies

Coming out of World War I the highest marginal income tax rate was 77%.  First Harding, then Coolidge (followin…