Depression of 1920
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The Depression of 1920 was a brief economic depression lasting from 1920-1921 during the latest days of the presidency of Woodrow Wilson and the beginning of the Warren G. Harding administration. This episode has recently been trumpeted by libertarians, wingnuts, and free market fundamentalists as definitive proof that doing nothing and letting the market sort itself out is always, always preferable to
socialism interventionist policy. The more historically illiterate often describe it as the "depression you've never heard of," "the forgotten depression," or "the often-overlooked depression." Usually, some comment about dirty liberals keeping it out of history textbooks follows, with an admonition to read some "real" history.
So why does this not prove the wingnuts' point in any way whatsoever?
- Milton Friedman and Anna Schwartz's Monetary History pins the blame on the Fed's overreaction to post-World War I inflation. It raised interest rates to new heights that put a massive deflationary pressure on the economy. There was also a general glut of agricultural products at the time as rations were no longer being sent overseas to troops in Europe. This would have had a big deflationary effect as well.
- The tax cuts and lower tariffs never happened, at least not during the period of 1920-1921. Harding didn't cut taxes until after the Depression had blown over and never lowered tariffs -- in fact, he signed the Fordney-McCumber act in 1922 which raised them.
- Harding wasn't 100% laissez-faire. While he did cut spending and maintained a balanced budget, he also passed the Farm Acts, a set of new regulations on agriculture. He also gave federal funding to states for public works projects.
- There were no widespread bank failures like there were in 1929 on.
- The depression let up when the Fed started running an expansionary policy.
- It's a completely cherry-picked example ignorant of economic history. The government did little to nothing through many of the numerous bank panics and depressions of the previous century. The Long Depression included an economic contraction that lasted longer than the one during the Great Depression.
So, no, the government didn't "do nothing," free market magic dust didn't cure the depression, and it does nothing to prove that the New Deal "made the Great Depression worse." Just more ignorant history from the usual suspects.
- Roaring Twenties
- Roosevelt Recession - for another case of wingnuts bullshitting
- Trickle down economics
- Depression of 1920 on Wikipedia
- Glenn Beck segment on the Depression
- Econospeak - Does the 1920-21 Recession Really Prove that Laissez-Faire Saves us from Recessions?
- Angry Bear - 1920s Depression Part I, Part II
- Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-1921 Depression," Journal of Economic History (1966) 26: 223-238. 
- Daniel Keuhn. A critique of Powell, Woods, and Murphy on the 1920–1921 depression. THE REVIEW OF AUSTRIAN ECONOMICS Volume 24, Number 3, 273-291.