The Depression of 1920–1921 and the Return to “Orthodoxy” (a)

Abstract

In March 1921, the Federal Reserve Board (FRB) wrestled with setting monetary policy during a severe economic contraction, called by many a depression. FRB members disagreed over whether to respond to the depression, and if so, how. The depression had sparked a crisis of purpose and policy within the FRB. For the past six years, FRB leaders had been trying to get the Treasury to allow the Federal Reserve (Fed) to pursue “orthodox” monetary policies; but the Treasury had demanded that the Fed implement policies that would support America's war effort. The depression also stoked intense criticism of the Fed from Progressives, Populists, labor, socialists, veterans, and farmers, who charged that the Fed caused the depression, and were now agitating for change. The FRB leaders confronted questions that seemed likely to shape the Fed for years to come. What should be the Fed's role in the American economy? How should the Fed help resolve World War I's debt burden and the resulting inflation? What reforms, if any, should the monetary authorities seek? Perhaps most importantly, was the “orthodoxy” of established practices still appropriate in the world that had emerged from the war? This case set has been taught successfully in Darden in-person and online classes. Excerpt UVA-F-1890 Rev. Aug. 7, 2020 The Depression of 1920–1921 and the Return to “Orthodoxy” (A) In early April 1921, the Federal Reserve Board (FRB) in Washington, DC, wrestled with setting monetary policy in the context of a severe economic contraction, called by many a “depression.” Members of the FRB (see Exhibit1) disagreed over whether to respond to the depression, and if so, how. The new US president, Warren G. Harding, inaugurated on March 4, 1921, seemed likely to bring new policy to the federal government, but offered no guidance. The depression had sparked a crisis of purpose and policy within the FRB. For the past six years, its governor, William P. G. Harding, and the governor of the Federal Reserve Bank of New York, Benjamin Strong, had argued bitterly with officials of the Treasury Department. William Harding and Strong had wanted the Treasury to allow the Federal Reserve (Fed) to pursue “orthodox” monetary policies, but the Treasury had demanded that the Fed implement policies that would support America's war effort. The depression also stoked intense criticism of the Fed from without. Progressives, Populists, labor, socialists, veterans, and farmers had charged that the Fed caused the depression. Now, these same groups agitated for change. . . .