How the Lockdown Could Cure Itself

Peter Shawn Taylor
May 12, 2020
In our ahistorical age, the “lessons of history” rarely rise above the level of casual slogan or self-serving proof. But what if there were two ready-made historical North American case studies showing how sharply different government approaches to an economic crisis can produce two starkly different results? And what if everyone is now focused on the wrong example? Peter Shawn Taylor dives deep into economic history and, with a respected Wall Street investment guru and historian as his guide, unearths a “Forgotten Depression” whose lessons could help us plot the best way out of our Covid-19 depression.

How the Lockdown Could Cure Itself

Peter Shawn Taylor
May 12, 2020
In our ahistorical age, the “lessons of history” rarely rise above the level of casual slogan or self-serving proof. But what if there were two ready-made historical North American case studies showing how sharply different government approaches to an economic crisis can produce two starkly different results? And what if everyone is now focused on the wrong example? Peter Shawn Taylor dives deep into economic history and, with a respected Wall Street investment guru and historian as his guide, unearths a “Forgotten Depression” whose lessons could help us plot the best way out of our Covid-19 depression.
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These are heady, if unsettling, times for anyone with an eye for the lessons of history. The Spanish flu epidemic of 1919-20 − which killed an estimated 40 million people worldwide, and 55,000 Canadians − is today frequently enlisted as a cautionary tale about the dangers of unchecked viral threats. The Black Death, a rat-born plague that left nearly one-third of Europe dead in the 14th century, has similarly become a widely-shared example of the damage done by past pandemics.

Economic analogies for the grim spring of 2020 are proving to be just as forbidding as the Black Death or Spanish flu. The cost of the current lockdown, in terms of unemployment, business failures, lost market value, and government deficits, has long since surpassed the Great Recession of 2008-09, heretofore the 21st century’s most significant downturn. According to Statistics Canada, “The employment decline in March was larger than in any of the three significant recessions experienced since 1980.”

Picture of hospitals during previous pandemics where a lockdown was not implemented
Cautionary tales of past pandemics abound, such as (depicted) the Black Death, which ravaged Europe in the 14th century.

Many commentators are reaching even further back into the previous century. “We are facing a period of profound adversity unlike any we have since the 1930s,” Alberta Premier Jason Kenney noted glumly. In similar fashion, William White, former deputy governor of the Bank of Canada, recently advised policymakers to “remember the lessons of the Great Depression” – a refrain that’s now as common as invocations of the Spanish flu.

But with historical references so much in vogue, we should be mindful that the lessons we’re remembering are the ones most salutary to our current situation. While no one wants a repeat of the Dirty Thirties, anyone hoping for the quickest possible return to economic normalcy once the coronavirus pandemic is over – a V-shaped recovery, in current parlance – should probably pay less attention to the many, many policy mistakes of the Great Depression and focus instead on government responses to past economic disasters that actually worked. And with this in mind, one well-regarded Wall Street soothsayer and historian says North America’s remarkable recovery from the severe slump in 1920-21 – an event that is all-but forgotten today – deserves a lot more attention. What was the secret to that miraculous success a century ago? Governments that did nothing.

James Grant, author of The Forgotten Depression: 1921 The Crash that Cured Itself.

For the past 37 years James Grant has been proprietor and editor of Grant’s Interest Rate Observer, a widely-respected US$1,295-a-year Wall Street newsletter noteworthy for its conservative − some might say curmudgeonly – approach to investing. His legendary skepticism about expansionary monetary and fiscal policy meant he was “notably prescient in 2007-08 when he warned of the debt bubble” that set off the Great Recession, according to Burton Malkiel, author of the famous A Random Walk Down Wall Street investment guide. Yet Grant’s most prescient and revelatory work may be a book he wrote in 2013 about a century-old economic event − The Forgotten Depression: 1921 The Crash that Cured Itself.

“I wrote the book because the one and only historical reference point served up during the recession of 2007-08 was the Great Depression,” Grant explains in a lengthy interview with C2C Journal. The same thing could be said about today. “But the Great Depression isn’t the only historical example we can learn from,” he says. “There was a depression in 1920-21 that was similar in depth and severity, but remarkable for its brevity. And I thought maybe we should make that our model for what to do.”

Grant’s forgotten depression (whether the economic downturn of 1920-21 was a depression or just a severe recession remains a matter of debate) began shortly after the conclusion of the First World War, as the Spanish flu was tightening its grip on the world. “You had this double blow of a pandemic laid on top of a global war that had just ended,” he explains. Inflation also became a problem as the world drifted away from the gold standard. Then came a collapse in global commodity prices and a stock market crash. The Dow Industrial stock index fell by 40 percent. U.S. corporate profits declined by 92 percent. Industrial production was down by a third.

Predictably, this economic chaos was followed by a rapid increase in unemployment as the private sector retrenched. While the labour market was not measured scientifically in the early 1920s, Grant suggests the unemployment rate may have hit 19 percent. (The current U.S. unemployment rate of 14.7 percent is the highest recorded since the beginning of reliable statistics in 1939.) “Unemployment was considerable,” he deadpans. It was an economic collapse every bit as significant as the Great Depression ten years later, or our situation today with the Covid lockdown. And if that sounds like political trouble, consider 1920 was also a presidential election year. “But here is the truly intriguing part of this story for a 21st century spectator,” says Grant, warming to his story. “What did the government do? Essentially nothing.”

Picture of protesters during Spanish Flu recession. Could we see similar actions after our Covid-19 lockdown?
Picture of individuals wearing medical masks during Spanish Flu. A now common sighting as politicians ease lockdown restrictions.
The post-World War I, post-Spanish flu recession was sharp, but far shorter than the Great Depression.

Despite all the economic bad news, Republican Warren Harding won the 1920 election with a promise to balance the budget and rein in government spending. To battle inflation, interest rates were hiked to seven percent. It was the very opposite of the nearly continuous monetary expansion of the past 20 years, events so large and frequent they’ve required the invention of a succession of new terms, such as “quantitative easing.” When Congress tried to hand out a “Soldier’s Bonus” to all First World War veterans in 1921 as a thinly-veiled stimulus package, Harding vetoed it. The President’s slogan: “Less government in business and more business in government.”

Warren Harding won a landslide election victory in 1920 on his platform of letting market forces sort things out, ushering in the Roaring Twenties.

The Harding administration was intent on letting market forces return the economy to equilibrium and voters seemed to agree. “It was a more stoical age,” Grant notes. “People were more inclined to keep their personal troubles to themselves.” And such stoicism was reflected in the bureaucracy as well as the electorate and administration. Consider the private correspondence of Benjamin Strong, president of the Federal Reserve Bank of New York and the country’s de facto central banker in the 1920s. Despite vociferous demands from the banking sector and elsewhere, Strong refused to lower interest rates as the downturn took hold. “I believe that this period will be accompanied by a considerable degree of unemployment, but not for very long, and after a year or two of discomfort, embarrassment, some losses, some disorders caused by unemployment, we will emerge with an almost invincible banking position,” he wrote to another economist.

It seems impossible to imagine a central banker today even counselling such a hands-off approach to monetary policy, either privately or publicly, let alone implementing it. Yet Strong’s tough medicine proved entirely correct. “Wages fell, but this allowed businesses to reset at a lower level,” observes Grant. Interest rates came down in step once inflation had been tamed. And soon investment capital poured in to take advantage of the new, lower market level. While the downturn of 1920-21 was undoubtedly a difficult time, what stands out today is its brevity. It was over and done in a mere 18 months, just as Strong predicted. And without any substantial government intervention; in essence the economy ‘cured itself.’ Thereafter followed what Grant calls a “spring-loaded recovery.”

Busy street in 1920s. Difficult to imagine exactly how the economy will recover from the lockdown
Toronto Queen Street during roaring 1920s. Will there be a return to Toronto Queen Street following the lockdown?
The Twenties saw economic growth of more than 40 percent on both sides of the border. (Above, image of Toronto’s Queen Street.)

After the downturn ended in 1921, the Twenties proverbially roared with exuberant growth and experimentation. Beyond a sharp rebound in the stock market and economic activity, the remainder of the decade is also notable for major developments in music, literature and cinema. It was called the Jazz Age. Women got the vote. Electrification took hold. Cars became a consumer item. At mid-decade production of Ford’s Model T, due to recently developed assembly line production techniques, reached 2 million cars per year. Price: $260. The U.S. economy grew by an astounding 42 percent in the 1920s – even including the effects of the downturn that kicked off the decade. Economic growth in Canada was similarly robust.

“If you look back at what the world had been through – the worst war imaginable, and then a pandemic and a depression – it was a tremendous release and relief that it was all over,” says Grant. On New Year’s Day 1923, the Wall Street Journal declared, “1922 can be recorded as the renaissance of prosperity.” Such an ebullient recovery should be our goal for the 21st century’s Twenties as well. (Although we’d want to avoid the subsequent stock market crash of 1929.)

There is no Canadian work equivalent to Grant’s book describing this country’s economic experience during 1920-21 – he calls it the Forgotten Depression for good reason. Typical of the scant coverage given to this period, the widely-used undergraduate textbook History of the Canadian Economy states simply “There was a sharp recession in 1921…[and] unlike the downturn a decade later, this recession was very brief.” It doesn’t discuss why. Yet plenty of historical evidence suggests our nation’s trajectory in wages, prices and jobs was remarkably similar to that in the U.S.

According to the Historical Statistics of Canada, a general labourer in Montreal earned 45¢ per hour in 1920. A year later, his wages fell 22 percent to 35¢ − equivalent to Alberta’s current $15 per hour minimum wage falling to $11.70 per hour. As Grant observes, however, while falling wages may be temporarily painful, they allow the labour market to clear quickly and recover. While the whole era’s economic statistics are woefully incomplete, the available historical data suggests Canadian wages largely stabilized by 1922.

For the remainder of the decade, the industrial composite employment index rose steadily, reflecting a healthy and growing labour market. The online high school history textbook Canadian History: Post-Confederation offers a bit more detail on the recovery: “In 1920-21 there was a brief but sharp economic collapse…the state pulled back at this time, trying to allow the capitalist market economy to take the lead…The substantial improvement in the economy after 1921 vindicated this approach.”


Unlike in the U.S., however, in Canada there was a political cost to be paid for such a hands-off approach. Conservative Prime Minister Arthur Meighen took office in 1920 at the beginning of the downturn and largely followed the intervention-avoiding Harding model. According to the Fraser Institute, Meighen is a member of an exclusive club of four Canadian prime ministers to have cut government spending during an economic downturn. The others are William Lyon Mackenzie King, Wilfrid Laurier and Louis St. Laurent. (The list of prime ministers who increased spending during a recession or depression is much longer, at 11.) Meighen badly lost the 1921 election to Mackenzie King, largely due to a shift in farm voters from Conservative to the new Progressive Party; today Meighen is remembered more for his long retirement than his very brief term as prime minister.

Headshot of Prime Ministers who did not cut spending during an economic turndown.
An exclusive Canadian Club: The only Prime Ministers who cut government spending during economic downturns: (l-r) Arthur Meighen, William Lyon Mackenzie King, Wilfred Laurier and Louis St. Laurent. Meighen was crushed, however.

Politics aside, the real lesson of the 1920s lies in its comparison with the Great Depression. While there are numerous story lines involved in the Great Depression, including a banking crisis and the curtailment of international trade, Grant’s book focuses on the key role played by government intervention in the labour market in prolonging the crisis. Following the devastating stock market crash on Black Tuesday, October 29, 1929 U.S. President Herbert Hoover (an engineer by training who’d been Harding’s Commerce Secretary) declared it was politically untenable to allow wages to fall as abruptly as they had a decade earlier. “It was Hoover’s conviction that capitalists should bear the brunt of this depression,” observes Grant. Nascent labour unions eagerly abetted such a policy. And it was effective, at least in the short term.

According to the U.S. Bureau of Labor Statistics, 92 percent of firms lowered their wages in 1921 in response to the downturn, whereas only 7 percent did so in 1930. But the longer-term result proved crippling to the economy. Businesses became caught in a vice of falling prices and artificially high wages from which they could not escape. “Without flexibility in wages, it is very difficult for businesses to reset at a new lower level of reality,” says Grant. Mass unemployment and chronically low wages thus lingered in the U.S. for the entire decade. Our Montreal labourer suffered similarly. His wages actually rose in the first year of the Great Depression, from 38¢ in 1929 to 40¢ in 1930. But this proved unsustainable as the economy collapsed, and his hourly pay ultimately fell to 28¢ by 1933; the national labour index also dropped nearly continuously throughout the 1930s, reflecting worsening unemployment.

Governments have found it difficult to resist political pressure to prop up wages during sudden downturns, but history demonstrates the negative long-term effects.

The length of the two economic slumps tells the tale. The Great Depression officially lasted for 43 months, from 1929 to 1933, and then returned again in 1937-38. The Forgotten Depression of 1920-21 was every bit as nasty as its better-known successor, but was over and done in a year-and-half. While the short-term pain was undoubtedly severe, the cumulative damage on every level – including the total earnings of our humble wage-earner – was a fraction of the size. Of the two great economic downturns of the 20th century, it seems painfully ironic that the “forgotten depression” is the one that we ought to remember for the remarkable success of its recovery.

While Grant says he wrote his book as a response to government missteps during the credit crunch that preceded the Great Recession, the lessons of 1920-1921 seem equally appropriate to today’s pandemic-inflicted economic lockdown. “The political response [to an economic crisis] is always ‘let’s protect the citizenry from a repeat of the 1930s,’” says Grant. That’s certainly been the dominant theme of 2020 as governments around the world are pouring unprecedented amounts of borrowed or conjured fiat money into the economy to protect wages and prop up businesses.

In Canada, nearly 8 million workers have applied for the federal government’s Canada Emergency Relief Benefit (CERB), which provides $500 per week to almost anyone who asks for it. This week it was revealed government bureaucrats are actually under orders to let cheaters continue to collect CERB or regular EI benefits. Over $30 billion has been paid out on CERB as of this month, with no end in sight. This has been followed by additional special programs for students, small businesses, large businesses, banks, landlords, farmers and the energy sector, plus wage subsidies for nearly every other imaginable group or component of the economy. Combined, the Parliamentary Budget Officer expects this year’s federal deficit to hit $252 billion, nearly an order of magnitude larger than last year’s projected $26 billion deficit, and a truly unsustainable 11 percent of the nation’s nominal GDP.

There are, of course, many good political reasons for unleashing this torrent of federal largesse. No politician wants to appear hard-hearted or oblivious to the many social costs of the economic lockdown and the mass unemployment it has engendered. And perhaps most important, unlike all previous downturns, people have been forced out of their jobs and into hiding by deliberate government edict, rather than through the collective actions of the market. But Grant’s historical evidence still serves as a strong note of caution to policymakers regarding the costs of allowing wages to calcify at current rates when conditions have changed so dramatically. “People had to get back to work in 1921, whereas now it’s not so clear,” he says.

For many workers, their various subsidies and benefits amount to more than they were making when the economy was still in fine fettle. There is also increasing talk of turning the CERB into a universal basic income program, which would remove the need to work from a large swath of the population. Plus, many unions are now demanding low-skilled workers in frontline service industry positions should receive permanent wage increases in addition to any temporary bonuses currently being earned. All this threatens to drive a wedge through the heart of the labour market by delinking marginal productivity from wage rates. Plus, why would anyone return to work if staying at home is more profitable, not to mention easier and seemingly safer?

Yet politicians who point this out can expect a fiery blast from softer hearts. Earlier this month, for example, Manitoba Premier Brian Pallister correctly noted how CERB posed an obstacle to his government’s efforts to encourage a return to economic normalcy. “We are fighting against a federal program that is actually paying people to stay out of the workforce,” he said. “I don’t like the fact…people are being paid to stay home and not work.” For his honesty, the Winnipeg Free Press editorial board labelled Pallister’s comments “inexcusable.”

Flyer explaining reasons why one should support a universal basic income. A policy being promoted in the lockdown as many people cannot work from home
Picture of job bulletin board. As a result of the lockdown workers through Canada and across all sectors have been affected.
Enacting a Universal Basic Income Program or permanent wage increases could slow the economic recovery and hold back employment growth.

But truth in policy-making, Grant argues, should require politicians to inform voters about the real choices involved in massive government intervention of the sort we are now experiencing. “Prices must be allowed to reach levels at which the market clears, whether that’s in the jobs market, stock market or real estate market. We can either let prices clear quickly and live with the short-term problems that creates, or the government can intervene to try to soften the blow, and in the process prolong the return to normalcy by years, or perhaps decades,” he says. Post-pandemic, encouraging workers to continue to stay home rather than work, or creating expectations that wages are fixed and must not fall as conditions change, will simply delay the recovery.

If Canada’s national goal is to enjoy a supercharged recovery once the Covid crisis ends, then the central lesson from a century ago remains valid today. Government should interfere as little as possible in the labour market, and thus allow wages to find their own level commensurate with prices and output. If anything, governments should reduce minimum wages to enable struggling small businesses to rehire as early and as much as possible. Alberta’s NDP-era minimum wage hikes several years ago severely damaged thousands of businesses without any need for a pandemic. Maximum flexibility is what the labour market requires now. Less regulation and government interference, rather than more.

“The economic logic is sound,” Grant says of his bold and controversial policy proposal. “But,” he admits, “Given today’s attitudes, the politics seem like a long shot.” Laissez faire policies are nearly impossible to promote during times of crisis. The need to be seen to be doing something, even if that something severely harms the economy, is simply overwhelming for most politicians. Yet often, doing nothing is provably the best course of action.

So having resigned himself to the fact the lessons from his Forgotten Depression are likely to stay that way, what does our investment guru predict for the prospects of a much-hoped for V-shaped recovery when the current pandemic ends? “It will be a different letter, that’s for sure,” Grant laments. “Maybe a U if we’re lucky. Maybe an L if we’re not.”

Peter Shawn Taylor is Senior Features Editor of C2C Journal.

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