 Welcome back once again to Mesa's Weekends. This is your host Jeff Deist. We hope you enjoy the new intro music and we hope you have a very safe and happy Memorial Day weekend. Our guest this week is none other than the great James Grant, author of a new book entitled The Forgotten Depression. Now Jim Grant recently spoke at our event in Stanford, Connecticut about his new book which chronicles the so-called Forgotten Depression of 1920 and 1921 under the then Warren G. Harding administration. The reason it's called The Forgotten Depression is because it was mercifully short and Mr. Grant has some ideas as to why it was so short. Namely both the federal government and the then youngish Federal Reserve Bank did the opposite of what they did during the more recent 2008 crash which is to say they applied real austerity. The federal government cut spending, it balanced budgets and the Fed allowed interest rates to rise and as a result the depression 1920 and 1921 is but a footnote in history as compared to the ongoing depression that we seem to still be living in following the 2008 crash. So we certainly hope you enjoy Mr. Grant's speech. Stay tuned next weekend for an interesting interview with an up-and-coming libertarian star Julie Borowski. Have a great weekend. Once upon a time in the early 20th century there was a deflationary depression. Unemployment reached double digits. The Dow was sawed in half and industrial production plunged farm incomes ditto from peak to trough. America's last governmentally unmedicated business cycle downturn spanned 18 months a year and a half and then it ended. Now why? That is the great question. If government must intercede, intervene, must stimulate why did this affair ever come to a conclusion? The fiscal response to it was to balance the budget. The monetary response was high interest rates, not none, high indeed in nominal terms and real terms that is to say the real feel interest rate, few weather fans. They were terribly high from yet as I say the depression did end. It was Hayek's price mechanism that performed the economic healing. My mission first is to describe what happened during the final year of Woodrow Wilson's regime in the opening months of Warren G. Hardings and second to relate those long ago occurrences to the present day. I undertook this project because back in 2008 the so-called Great Depression out of the 30s seemed to monopolize the market in historical analogy as far as I know not one person in a position of political authority invoked the episode in which there was no stimulus quite on the contrary in which the methods of macroeconomic medieval torture as the mainstream might interpret them, those methods were employed and yet as I say the depression ended and the 20s roared. You may say many have said that 1921 was a long time ago and so it was then so was 1931 and you may observe the world has changed since 1921 and that too is correct then again it has changed since 1931. I submit that in respect to the study of economic history the 20s are just as deserving as the decade that followed as Amity Schles reminds us 1930s did no honor to American public policy. Monetary manipulation, heavy taxation, punitive regulation, fiscal stimulus and persistently low interest rates failed to restore the harding, coolage, prosperity so I turned my attention to the decade that did roar. Now they say that the past is a foreign country. In monetary and banking and regulatory arrangements the 1920s seemed especially alien and perhaps to some of you especially welcoming. 95 years ago the dollar was defined as a thing, as a weight of goals, a corporeal unit and the shareholders of a nationally chartered bank were responsible for the solvency of the institution in which they held a fractional interest, meaning that if their bank failed or became impaired they got a capital call. The stockholders after all had earned the dividends on the upside. The taxpayers got no share of the downside because after all they earned none of the profits during the expansion. That particular sort of Damocles was called double liability. So patterns of thought and speech were likewise different from today's and perhaps instructively so. The abstraction that we moderns call the economy had not yet been contrived, conceived. People spoke of good times and bad times but not of a thing that could be measured, let alone managed or controlled. You may remember that in the 1960s John Copperthwaite, the governor of the then British colony of Hong Kong refused to allow the collection of economic data lest the bureaucrats misappropriate that information in the service of macroeconomic manipulation. It was a mercy that Harding and Wilson had precious view data at their disposal even if they were inclined to implement the cyclical policies that were not as yet invented. So ill it was the economic terrain at the time that the Republicans meeting to nominate Harding in the summer of 1920 when the depression was then seven months old. They did not mention the economy in their in their platform except in the context of government spending. Economy and government was the only way in which the the e-word appeared in that document. So it was indeed a long and distant time passed. How did the depression happen? Well it came out of the First World War which the combatants fought on the cuff. They borrowed and they they taxed but mostly they borrowed and they printed. They abolished the gold standard as soon as the canon reword and they gave rise to a terrific inflation. Then came the peace and then with it came the expectation that prices would fall. They always had. They fell after the Napoleonic wars. They fell after the civil war in this country. But in the way of markets expectations were confounded and prices went up and up and there was a wonderful inflationary boom in 1919. David Stockman was so eloquent on the point of price discovery and what prices mean. They are the traffic signals of a market economy. They flashed red, green, and amber except when they flashed only green as they did in 1919. Well people taking their cue from these faux prices took actions they presently would have caused to regret. General Motors even then American an American blue chip built itself the biggest headquarters building the world had ever seen. Twenty million dollars worth in Detroit. A couple of war veterans Harry Truman and Eddie Jacobs had opened a haberdashery in Kansas City using bank credit alone. Very little equity. Farmers planted fence posts with land that they had mortgaged to farm and as booms do this one went boom and commodity prices began to break and they broke and they broke. In a retrospective in the 1920s the government statisticians discovered that never before and indeed never subsequently have prices smashed so fast or so hard. It was a worldwide depression. Japanese silk prices being the cutting edge of the new deflation. Presently things got very rugged indeed. Unemployment was not then mentioned measured but it surely was the double digits. There was no federal safety net that people saved or did without or had relatives. There was privation. Industrial production was down 30 percent top to bottom yet it did end and how was that how was that. Well it seems that not only did prices fall but so critically did wages and because wages fell somewhat in sympathy with prices. Capitalists could establish levels of new profitability at lower levels of activity and of prices and then too money was mobile. Gold was money perhaps still is but certainly then was legally money and though the Fed actually contracted its balance sheet David Stockman mentioned the era in which we live one of ever expanding federal reserve assets and liabilities then the Fed actually contracted but more than counteracting that contraction was the incoming flow of gold from foreigners who took the GOP platform at its word that is to say more business and government and less government in business. So confidence that evanescent thing was a very real thing perhaps it still is but confidence pulled in gold and low prices attracted speculation and investment. I want to give you a sense of what you stock market officials of what the bottom looked like in an unmedicated stock market sell-off. 1921 August 1921 the stock market touched bottom and here is what it looked like. Coca-Cola even then a pretty splendid growth stock people bought it in 1919 is a prohibition play but they presently sold it bear markets being what they are at the bottom at $19 a share coke was valued at 1.7 times what it would earn in 1922 the shares provided a dividend yield of five and a quarter percent. Gillette Gillette's safety eraser company which is sold just as many razors and blades in the depression as it had in the boom that stock was priced for liquidation nearly five times forward earnings and yielded nine and a quarter percent RCA Radio Corporate of America not yet revealed as the greatest growth stock of the first 50 years certainly of the decade of the 20s RCA was valued for only as much as what the company would actually earn in the way of profits in 1923 it was a dollar and a half a share this was in august of 1921 and by the time a few months had rolled on there were labor shortages in Detroit the Wall Street Journal in a retrospective of 1922 called it the year of the renaissance of prosperity so that was a that was a cycle it was a cycle of the interplay of prices and wages and of interest rates and of capital market valuations it was a our last such episode in which the government did not play anything like an active role and I hold it up for you was a as a splendid example of what happens or what can happen in times of of untended unmanipulated markets to emphasize there was plenty of suffering the people who lived through it did not feel it was so very keen and indeed nine years later when it came to reckon the policy response to what would be called the great depression people ran away from what we might take to be the lessons the revealed lessons 1921 but such is human experience we keep on stepping on the same rakes which is very good for journalism we know the script we don't we only need the facts and the details you know Hayek is a name that ought to be invoked here given Caitlyn Long's affiliation with the Hayek Society and I will close with the observation that uh that what was absent conspicuously absent in 1921 was the conceit of people who felt they knew the future before it could happen oh there was plenty of speculative stargazing there's plenty of guesswork about the future but there was very little cocksure policymaking based upon conceptions we call the models of how the future ought to unfold uh it presents quite a contrast to the present day it's such a lovely day to date you recall you new yorkers especially the blizzard that wasn't late in january up here uh it was to have been said the weathermen on the friday before the fatal monday it was to have been the greatest snowstorm since the dutch arrived in manhattan now i always root for blizzards and i was pleased by this information my wife and i took our post monday night at a restaurant with a wonderful picture window and sat back to wait for the event as the evening wore on uh i couldn't help but notice that it wasn't snowing now when you think about a snowflake uh they are unique our snowflakes uh beautiful but they are inanimate uh they have no attitude they don't change their mind on account of something they read in the worldwide web or because some of them read on david stockman's blog they they come and they go or they don't and when you think about the number of observations that scientific meteorologists must have had about approximately similar wind and weather conditions and the facility with which they could ram these observations through in a big data fashion and powerful computers when you think about the likelihood of they're getting this right and the bald fact of they're getting it wrong when you think about all these things you are reminded about the pretense of what our federal reserve overseers are pleased to call their dynamic stochastic general equilibria model a model in place in 2007 which however failed to detect the biggest cyclical event in the lives of the model builders so in thinking about the episode of 19 2021 uh one thinks of all sorts of things i think of the glory of of the price mechanism of adam smith's invisible hand and i'm also reminded of of an essential element of the kayaking cannon which is which is humility in the face of what we can't know and uh so the economy the economy uh the economy thing we can't taste see or smell but which we somehow believe to be real that is only a concept doesn't actually exist neither does the future exist so the next time you hear someone dilating upon the future of the gdp ladies and gentlemen i want you to walk out of the room so that's my speech so thank you