The Review of Austrian Economics

, Volume 24, Issue 3, pp 273–291 | Cite as

A critique of Powell, Woods, and Murphy on the 1920–1921 depression

  • Daniel KuehnEmail author


A series of recent reviews of the depression of 1920–1921 by Austrian School and libertarian economists have argued that the downturn demonstrates the poverty of Keynesian policy recommendations. However, these writers misrepresent important characteristics of the 1920–1921 downturn, understating the actions of the Federal Reserve and overestimating the relevance of the Harding administration’s fiscal policy. They also engage a caricatured version of Keynesian theory and policy, which ignores Keynes’s views on the efficacy of nominal wage reductions and the preconditions for monetary and fiscal intervention. This paper argues that the government’s response to the 1920–1921 depression was consistent with Keynesian recommendations. It offers suggestions for when Austrian School and Keynesian economics share common ground and argues that the two schools come into conflict primarily in downturns where nominal interest rates are low and demand is depressed. Neither of these conditions held true in the 1920–1921 depression.


Macroeconomics Economic history Keynesianism Austrian School Monetary policy Fiscal policy 

JEL Codes

B53 E12 E31 E32 E58 E62 N12 



I would like to thank Wayne Vroman, Tom Woods, Jeffrey Herbener, and two anonymous referees for their helpful comments. I am also grateful to Steve Horwitz for the insights he provided on how to frame this research so that it would be useful for the community of Austrian economists. The standard disclaimer applies.


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Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.The Urban Institute, Center on Labor, Human Services, and PopulationWashington DCUSA

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