“Laissez-faire was, roughly, the traditional policy in American depressions before 1929. The laissez-faire precedent was set in America’s first great depression, 1819, when the federal government’s only act was to ease terms of payment for its own land debtors. President Van Buren also set a staunch laissez-faire course, in the Panic of 1837. Subsequent federal governments followed a similar path, the chief sinners being state governments which periodically permitted insolvent banks to continue in operation without paying their obligations. In the 1920–1921 depression, government intervened to a greater extent, but wage rates were permitted to fall, and government expenditures and taxes were reduced.” (Rothbard 2008: 185–186).The trouble with this is that the evidence on wages in this period is contradictory.
It seems that the period from 1916 to 1923 was one of unusual wage volatility in the United States, but that was the result of wage increases in the First World War and the subsequent fall that began in 1918 well before the recession of 1920–1921 (Sundstrom 1992: 432–433).
If one looks at real wages from 1920–1922 in the graph below that shows farm wages versus average hourly manufacturing wages (with data from Cole and Ohanian 2000: 190, Table 4), it can be seen that, while farm wages fell significantly, real manufacturing wages actually rose.
So something is wrong with the story Rothbard paints above.
Barkley Rosser, J. “Does the 1920–21 Recession really prove that Laissez Faire saves us from Recessions?,” Econospeak, November 8, 2010
Cole, Harold L. and Lee E. Ohanian. 2000. “Re-Examining the Contributions of Money and Banking Shocks to the U.S. Great Depression,” NBER Macroeconomics Annual 15: 183–227.
Rothbard, Murray Newton. 2008. America’s Great Depression (5th edn.). Ludwig von Mises Institute, Auburn, Ala.
Sundstrom, William A. 1992. “Rigid Wages or Small Equilibrium Adjustments? Evidence from the Contraction of 1893,” Explorations in Economic History 29.4: 430–455.