and saw to it that the laissez-faire view that unemployment was a problem that the market would cure was not allowed to become widely accepted.27 He also promoted a proto-Keynesian policy of pressuring governors to speed up the awarding of road-building contracts.28
Many Americans, including some highly conservative ones, instinctively reached for solutions more consistent with underconsumptionist or Keynesian thinking than with the neoclassical position. In 1919, two prominent governors who later became even better known, Calvin Coolidge and Al Smith, both promoted public-works spending as a means of relieving unemployment.29 Church groups called for high wages to maintain purchasing power.30
Labor leaders, who had previously proclaimed their faith in a high-wage policy as a means of stimulating consumption, added new wrinkles, promoting shorter workweeks to “spread the work” and restrictions on immigration to prevent job displacement of native-born Americans.31
Many of the participants in the Unemployment Conference were of the view that unemployment was a result of inadequate spending. They favored high wages as a means of providing purchasing power and dealing with underconsumption. At least one interpretation of the conference was that the goal was to raise the adjusted real wage: “if it really succeeds in its commendable attempt to stimulate buying by forcing manufacturers, middlemen and merchants to accept lower profits, it will have done better than could have been expected.”32 Most emphatically, the conference rejected the view that adjustments in relative prices (especially downward adjustment in wages) could solve any severe unemployment problem without government intervention. The leading proponent of that position within government, Hoover, said in 1923: “We are constantly reminded … that there is an ebb and flow in the demand for commodities that cannot … be regulated. I have great doubts whether there is a real foundation for this view. “33
The Unemployment Conference, which met intermittently until February 1929, accepted the notion of countercyclical public-works spending to stimulate demand, speaking of the “multiplying effect of successive use of funds in circulation.”34 It spoke of the need for business-government cooperation, the need for better economic statistics, etc., but not of the ability of the market system to alleviate problems of unemployment. The report sounded more Keynesian or post-Keynesian than neoclassical in its approach to the problem.
In short, while there was some awareness of the role that wages might have played in explaining the 1920–22 business fluctuations, the idea that excessive real wages were the culprit was very far from universally held. Moreover, the people who most strongly rejected the neoclassical approach, especially Hoover, were destined to assume greater importance in the decision-making process within a few years, a development that had tragic results.
The New Era, 1922–1929
The seven years from the autumn of 1922 to the autumn of 1929 were arguably the brightest period in the economic history of the United States. Virtually all the measures of economic well-being suggested that the economy had reached new heights in terms of prosperity and the achievement of improvements in human welfare. Real gross national product increased every year, consumer prices were stable (as measured by the consumer price index), real wages rose as a consequence of productivity advance, stock prices tripled. Automobile production in 1929 was almost precisely double the level of 1922.35 It was in the twenties that Americans bought their first car, their first radio, made their first long-distance telephone call, took their first out-of-state vacation. As noted earlier, this was the decade when America entered “the age of mass consumption.”36
THE EMPIRICAL RECORD AND THE WAGES HYPOTHESIS
As indicated above, our adjusted real wage model does an excellent job of predicting the strong labor market of this period. Our mean annual estimate of unemployment over the period of 3.4 percent is only very slightly different from the actual rate of 3.3 percent.
The only year which can even remotely resemble a high unemployment year was 1924, when unemployment reached 5 percent. The modest increase in unemployment that year reflected a large increase (5.6 percent) in hourly wages. The adjustment mechanism, however, worked well. Hourly wages stopped rising the following year. Productivity fell very slightly, but this in turn was more than offset by some increase in prices. The adjusted real wage accordingly fell in 1925, and with it, the unemployment rate.
THE GENESIS OF THE IMPENDING CRISIS
While there is no dispute that the twenties were a period of great prosperity and little unemployment, it can be argued that the seeds of the economic debacle that followed were being sown during the New Era. There was a tremendous growth in the popularity of an underconsumptionist line of reasoning that rejected the classical doctrine of nonintervention in market processes. In addition, monetary intervention in the form of “fine-tuning” was beginning to be practiced, and this created a tradition of intervention that was to prove devastating a few years later.
The evidence regarding the first point is strong. There was growing respect for what William J. Barber calls the “high-wage policy” from three quarters: businessmen, writers, and government officials.37 High wages meant greater purchasing power and, to some, better worker morale and thus productivity. While Henry Ford popularized the high-wage policy with his five-dollar-a-day wage in the previous decade, others took up the cause. The very highly regarded Boston retailer Edward Filene (patron of the Twentieth Century Fund) wrote in defense of minimum-wage laws and other wage-enhancing measures.38
The view that business downturns and unemployment reflected inadequate purchasing power (what Keynesian economists later called “insufficient aggregate demand”) was popularized by two amateur economists whose books were widely read, William Trufant Foster and Waddill Catchings.39 Some writers, like Stuart Chase and Rexford Tugwell, believed that cyclical fluctuations required governmental planning and intervention.40
The strongest opponent of a noninterventionist, laissez-faire philosophy within government was Secretary of Commerce Hoover. Hoover’s initial appointment to President Harding’s cabinet was strongly opposed by old guard Republicans on the grounds that Hoover was “too liberal, too internationally minded, too popular, and too ambitious.”41 Hoover was sometimes called the Secretary of Commerce and “assistant secretary of everything else.”42
Involved in virtually everything, Hoover believed that the government could enhance efficiency by working with trade associations, by, for example, promoting standardization of measurements and parts among competing firms. A believer in what later was called indicative planning, Hoover took actions to increase economic information (such as initiating the Survey of Current Business) in the hope that it would permit reductions in business 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