cycle activity. He favored strict immigration restrictions and high tariffs as a means of stimulating wages and purchasing power.
Some Austrian economists have suggested that emerging inflationary tendencies in the Twenties contributed to the problems that were to follow.43 To non-Austrian economists, a cursory inspection of the price indices of the period makes one skeptical of this argument, since the consumer price index in 1929 was only 0.4 percent higher than in 1923, while the wholesale price index had declined about 5 percent, and the GNP price deflator also showed a small decline.
At the same time, however, there is some basis for the Austrian position. Typically (for example, after the Civil War), prices fell after wars to levels not too different from those that prevailed before then. Yet, in 1929 consumer prices were higher than at the end of the war, and substantially higher than at the beginning. The money supply (M2) was almost 30 percent higher at the beginning of 1929 than six years earlier, an annual average increase of more than 4.4 percent, and the ratio of reserves to deposits fell significantly while the ratio of deposits to currency rose.44 Between 1923 and 1928, Federal Reserve loan and security assets, reflecting open-market operations and loans to banks, rose a robust 47 percent, signaling an extremely expansionary monetary policy. Nominal interest rates on bonds fell twenty to over one hundred basis points from 1923 to 1928.45
The new central bank undoubtedly contributed to greater monetary expansion than would have existed in its absence, contributing perhaps to the boom in the twenties (by keeping real wages and real interest rates lower than otherwise) and to the subsequent decline, which was aggravated by a retreat from the overexpansionary policy after 1928. According to the Austrian view, a “discoordination” of relative factor prices resulting from the expansionary monetary policy sowed the seeds for the depression that followed. This, of course, assumes that the public’s expectations in this era were slow to react to policy changes (e.g., that money wages were not dramatically impacted by the substantial monetary expansion).
As the Gilded Age wound down, unemployment tended to be low and quickly returned to a normal or natural rate after short-lived increases. By all standards, the years after 1922 were especially successful. Yet, beneath the surface of that prosperity, the basis for future problems was being laid, as a new interventionist philosophy on the part of popularizers of economics, “progressive” businessmen, government officials, and monetary authorities was gradually winning favor, even taking credit for the extraordinary advances that occurred. Increasingly, the view that unemployment fluctuations reflected temporary market disequilibrium was deemphasized and a new, more interventionist approach was gaining respectability. This development would soon contribute in an important fashion to the policy mistakes that would produce the greatest economic downturn ever observed in this country.
NOTES
1. Paul Bairoch, “Europe’s Gross National Product: 1800–1975,” Journal of European Economic History 5 (1975): 273–340. Unless otherwise indicated, all macroeconomic statistics on the American economy in this chapter are from U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1970 (Washington, D.C.: Government Printing Office, 1975).
2. The debate is particularly pronounced as to whether lower-income groups shared in the prosperity of the 1920s. The conventional view is that they did only to a very limited extent. See, for example, John Kenneth Galbraith, The Great Crash (Boston: Houghton Mifflin, 1961), p. 182. Empirical support for this view is found in Charles Holt, “Who Profited from the Prosperity of the Twenties?” Explorations in Economic History 4 (1977): 277—289. In our judgment, however, Gene Smiley has effectively destroyed this argument. See Gene Smiley, “Did Incomes for Most of the Population Fall from 1923 to 1929?” Journal of Economic History 43 (1983): 209–16.
3. W. W. Rostow, The Stages of Economic Growth (Cambridge: Cambridge University Press, 1959), pp. 10-11.
4. Harold U. Faulkner, The Decline of Laissez Faire, 1897–1917 (New York: Rinehart & Co., Inc., 1951).
5. On this point, see Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1987), especially chaps. 6 and 7.
6. The implication is, of course, that there was a great deal of real-wage flexibility in this period. This conclusion has been challenged somewhat by William A. Sundstrom in his “Was There a Golden Age of Flexible Wages? Evidence from Ohio Manufacturing, 1892–1910,” Journal of Economic History 50 (1990): 309–20.
7. Christina Romer, “Spurious Volatility in Historical Unemployment Data,” Journal of Political Economy, 94 (1986): 1–37.
8. R. M. Coen, “Labor Force and Unemployment in the 1920s and 1930s,” Review of Economics and Statistics 55 (1973): 46–55.
9. The definitive study, of course, is Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, N.J.: Princeton University Press for the National Bureau of Economic Research, 1963), pp. 156-168. For money stock data, see ibid., p. 706.
10. New York Times, April 22, 1908, p. 3.
11. Ibid., December 17, 1908, p. 8.
12. The Nation, November 5, 1908, pp. 429–30.
13. New Republic, December 19, 1914, p. 4.
14. New York Times, July 7, 1915, p. 9; August 7, 1915, p. 14.
15. New Republic, April 10, 1915, pp. 250-51.
16. Willford I. King, Employment, Hours and Earnings in Prosperity and Depression, 2d. ed. (New York: National Bureau of Economic Research, 1923), p. 87. This volume is an invaluable source for persons interested in labor-market developments during the 1920–22 downturn.
17. The data used in the analysis of the 1920–22 downturn were obtained from the Federal Reserve Bulletin for various issues between 1921 and 1925.
18. The factory employment data and price data can be found in an enormously useful volume, Geoffrey H. Moore, ed., Business Cycle Indicators, 2 vols. (Princeton, N.J.: Princeton University Press for the National Bureau of Economic Research, 1961), 2: 118.
19. See Friedman and Schwartz, Monetary History, p. 710. See also their discussion on pp. 231-39.
20. Ibid., p. 237.
21. The data were obtained from various issues of the Federal Reserve Bulletin for the years 1920 to 1923.
22. Paul H. Douglas, “The Movement of Real Wages and Its
