The Forgotten Depression—1921: The Crash That Cured Itself, by James Grant. New York: Simon & Schuster, 2014. 281 pp., $28 (hardcover).

It is widely accepted today that economic downturns require massive “countercyclical” government interventions, such as increased government spending to “stimulate” the economy, and suppression of interest rates by the Federal Reserve to encourage business expansion, home sales, and the like. Government intervention, almost everyone believes, is necessary to rescue the economy, lest it cascade ever downward, throwing more and more people out of work and businesses into bankruptcy.

James Grant, the founder of Grant’s Interest Rate Observer, challenges that dogma. In The Forgotten Depression—1921: The Crash That Cured Itself, Grant tells the story of the economic slump of 1920–21, “America’s last governmentally unmedicated depression” (p. 1), and compares the results of the nonintervention to the downturn of 1929–30, which was met with massive intervention and subsequently collapsed into a great depression.

The seeds of the 1920–21 depression were sown by U.S. monetary policy surrounding World War I. The wartime price increases were initially ignited by a massive fear-driven influx of gold from Britain, France, and Germany, which had abandoned the gold standard, into the then-neutral United States, “whose currency was still as good as gold” (p. 49). This temporarily swelled the U.S. money supply, igniting a short-term rise in the cost of living. Under the gold standard, Grant explains, prices can fluctuate in the short term but are “uncannily stable over the long run” (p. 49).

But that initial uptick was made rampant by a fledgling Federal Reserve buying up massive amounts of federal government debt to finance America’s entrance into the war. Grant offers an in-depth examination of this period in chapters 1–3, “The Great Inflation,” “Coin of the Realm,” and “Money at War” (pp. 11–54). As Grant observes, the largely Fed-driven wartime inflationary boom “set the stage for a worldwide deflationary depression” (p. 54).

The slump began in January 1920 under the administration of Woodrow Wilson and ended in July 1921 under the Warren G. Harding administration. Neither administration took so-called corrective action to counter the business cycle. . . .

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