To combat the Great Recession and its long-lingering aftermath, leading central banks have pulled some $10 trillion out of thin air. Governments of the world’s principal economies have rung up almost $20 trillion in deficit spending. We often hear that the authorities have done too little. Perhaps they have done too much.

Not so long ago, the authorities did hardly anything. In response to the severe, little-known economic slump of the early 1920s, they virtually sat on their hands. It is an often forgotten episode that suggests...