The Forgotten Depression, 1921: The Great Crash That Cured Itself.

• Author: Salerno, Joseph T.
• Position: Book review

* The Forgotten Depression, 1921: The Great Crash That Cured Itself

By James Grant

New York: Simon and Schuster, 2014.

Pp. xii, 254. $28 hardcover.

The Forgotten Depression is a narrative history of the depression of 1920-21. Although it is informed by a very definite theory-the Austrian business cycle theory-it is not a standard work in applied economics. It does not first present the theory in a rigorous formulation and then move on to apply the theory by adducing pertinent qualitative facts and statistical data to explain a complex historical event such as a depression. It instead proceeds by way of anecdotes and contemporary media accounts, liberally seasoned with telling quotations from politicians, policy makers, economists, business leaders, and other contemporary observers of the unfolding depression. Data on money, prices, and production are inserted at crucial points to keep the reader abreast of the economy's precipitous decline, but they do not dominate and weigh down the story. James Grant, a masterful stylist, effectively weaves these disparate elements into a seamless and compelling narrative that never flags in pace or wanders off track. The book should appeal to a wide variety of readers, from college students and business professionals to academic economists and policy makers.

By proceeding anecdotally, Grant gives the reader an intimate "fed" for the intellectual milieu prevailing at the time, offering a bracing immersion into an economic paradigm unimaginably alien to contemporary thinking about business cycles. It is for this reason that the book is especially valuable for academic economists whatever their theoretical bent or policy predilections. Grant conveys to the reader a clear understanding of a policy for curing depressions that was nearly universally prescribed in the era before macroeconomic concepts and formulas fastened themselves upon the minds of economists and media opinion molders. This policy is today derisively referred to as "liquidationist."

To understand the liquidationist position, one must first grasp its foundational concepts and assumptions. In the world of the early 1920s so richly portrayed by Grant, there was no national macroeconomic entity with which economic theory and policy were concerned: "As far as the political-economic mind of 1920 was concerned, there was no 'U.S. economy.' And as the economic totality was yet unimagined, so too was the government's role in directing, managing and stimulating it" (p. 128; see also p. 67). Economists-with a few notable exceptions-did not think of the "price level" as a unitary statistical construct or worry overmuch about its fluctuations. Nor did they try to calculate...