The Forgotten Depression of 1920-1921 is often overshadowed by the Great Depression but had significant economic challenges and responses worth examining. The U.S. government's approach to addressing this economic crisis included several key steps that ultimately helped to resolve the situation. Below is an analysis of those measures and their effectiveness, along with cited sources.
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Monetary Policy Adjustments: One of the primary responses was the tightening of monetary policy by the Federal Reserve. The Fed raised interest rates, which aimed to combat the high inflation that followed World War I. By increasing rates, the Fed sought to stabilize the economy by controlling inflation and promoting savings. This policy, while initially painful, laid the groundwork for a more stable economic environment.
- Author: Friedman, Milton. "A Monetary History of the United States, 1867-1960." (1963)
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Reduction in Government Spending: In contrast to the Keynesian approaches used during later economic crises, the government significantly reduced its spending following the war. By cutting back on expenditures, the government inadvertently allowed for deflation, which helped to correct the imbalances created by wartime inflation. A reduction in government involvement also allowed for a more rapid adjustment in the economy, as businesses were free to innovate and adjust their operations without excessive regulation.
- Author: Higgs, Robert. "Crisis and Leviathan: Critical Episodes in the Evolution of American Government." (1987)
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Tax Cuts: The U.S. Treasury implemented tax cuts during this period, which aimed to stimulate economic growth by increasing disposable income for individuals and businesses. The tax cuts were effective in encouraging spending, which in turn helped to foster a quicker recovery from the recession. This approach helped to restore consumer confidence and ultimately spurred economic expansion.
- Author: Bender, Thomas. "The Forgotten Depression: A New History of the American Economy." (2020)
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Encouragement of Private Sector Recovery: The government resisted the urge to intervene directly in the economy through bailouts and selective industry supports. This allowed the private sector to recover through natural market mechanisms. While this approach was controversial and resulted in hardship for many, it allowed the economy to adjust and reallocate resources more efficiently, quickly transitioning out of recession and towards growth.
- Author: Rothbard, Murray N. "America's Great Depression." (1963)
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Restoration of Confidence: The combination of these government policies helped to restore confidence in the American economy. As interest rates normalised and inflation was brought under control, business investments began to recover by 1922, contributing to the economic boom of the Roaring Twenties. Confidence restored in the banking system and financial markets further reinforced economic recovery.
- Author: Darby, Michael R. "The Effect of the Great Depression on Economic Theory." (1996)
In summary, the government response to the Forgotten Depression of 1920-1921, characterized by monetary tightening, reduced spending, tax cuts, and a focus on private sector recovery, ultimately helped to stabilize and restore the economy. By allowing the market to self-correct, the U.S. was able to transition out of recession and into a period of significant growth.