An Excerpt Worthy of Thought

From Jim Grant's review of "Grand Pursuit: The Story of Economic Genius" by Sylvia Nasar:

There isn't room for every economist in this book or any other, but I myself missed the voice of Jacques Rueff, the 20th-century theorist who was able to demonstrate the superiority of the classical gold standard over the faux gold standard devised by Keynes (incorporated in the Bretton Woods system of 1944-71) or the paper-money regime advocated by Fisher and Friedman.

I missed, as well, Murray Rothbard, who blamed the Great Depression on the Hoover administration. It didn't intervene too little, Rothbard unconventionally sought to show in his 1963 book, "America's Great Depression," but rather too much. The economics profession just smiled at this contention, but the unsolved case of the depression of 1920-21 counts heavily for Rothbard's thesis. It was a deep and painful slump (a young Army veteran, Harry S. Truman, lost his Kansas City haberdashery to bankruptcy), with the wholesale price index dropping by 37% and the measured rate of unemployment tripling to 12%.

But it ended. Why it ended will mystify anyone who has taken to heart the arguments of Keynesians for more fiscal and monetary stimulus to revive today's economy. To meet the crisis that spanned the administrations of Woodrow Wilson and Warren Harding, the Treasury ran a budget surplus and the Fed raised interest rates. Yet the slump did end, and the 1920s roared. 

Honestly, this seems to be an episode that everyone who is not in favor of government intervention, or who has some sympathy to Austrian economics, points out. This may be confirmation bias, but I look at it to and ask myself that if mainstream economics can not explain the Depression of 1920-21 and how it ended without intervention (and quickly too!), then enough is missing in their theory to doubt the contention that intervention will work here.

See also George Selgin's post on this, which I had previously mentioned. There have likely been plenty of other austere recoveries in world history. It is a shame that economists, for whom world history is supposed to be the dataset off which they derive their macroeconomic theories, might have failed to consider evidence that contradicts their views. Or is it confirmation bias?