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The Forgotten Depression of 1920

Written by admin | Sep 14, 2014

tomwoodsby Thomas E. Woods, Jr.

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.

The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923…

It is intervention into the market that brings about the cycle of unsustainable boom and inevitable bust. As business-cycle theorist Roger Garrison succinctly puts it, “Savings gets us genuine growth; credit expansion gets us boom and bust.”

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This phenomenon has preceded all of the major booms and busts in American history, including the 2007 bust and the contraction in 1920–1921. The years preceding 1920 were characterized by a massive increase in the supply of money via the banking system, with reserve requirements having been halved by the Federal Reserve Act of 1913 and then with considerable credit expansion by the banks themselves.

Total bank deposits more than doubled between January 1914, when the Fed opened its doors, and January 1920. Such artificial credit creation sets the boom–bust cycle in motion. The Fed also kept its discount rate (the rate at which it lends directly to banks) low throughout the First World War (1914–1918) and for a brief period thereafter. The Fed began to tighten its stance in late 1919…

Harding’s inchoate understanding of what was happening to the economy and why grandiose interventionist plans would only delay recovery is an extreme rarity among 20th-century American presidents. That he has been the subject of ceaseless ridicule at the hands of historians, to the point that anyone speaking a word in his favor would be dismissed out of hand, speaks volumes about our historians’ capabilities outside of their own discipline…


Harding inherited Wilson’s mess— in particular, a post–World War I depression that was almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933 that FDR would later inherit. The estimated gross national product plunged 24 percent from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million to 4.9 million…

Harding’s Budget and Accounting Act of 1921 provided a unified federal budget for the first time in American history. The act established (1) the Bureau of the Budget with a budget director responsible to the president, and (2) the General Accounting Office to help cut wasteful spending.

In the fall of 1921, Harding’s Secretary of Commerce Herbert Hoover prompted him to call a Conference on Unemployment. Hoover wanted government intervention in the economy, which as president he was to pursue when he faced the Great Depression a decade later, but Harding would have none of it. Good thing, since Hoover’s policies were to prolong the Great Depression. Harding said, “There will be depression after inflation, just as surely as the tides ebb and flow.” Harding insisted that relief measures were a local responsibility…

Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes were cut from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding’s policies started a trend. The low point for federal taxes was reached in 1924. For federal spending, in 1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930…   [Academia and the Fed ignore Harding’s success because it is anathema to them.]

Rather than follow the model of FDR— whose policies raised only Americans’ spirits— President-Elect Obama ought to consider the model of Warren G. Harding, whose policies raised Americans’ standard of living, and lifted the nation itself out of a depression— before it had a chance to become Great.


The Other Great Depression

It’s a few years after the war and things are dire indeed. US farm export sales crashed as European farms returned to production after WW1. The beginning of depression was extraordinarily sharp: the U.S. price level declined by over 40% in 6 months and 56% for the year. The highest decline ever in the whole history of the United States. [record US deflation] The gross national product plunged 24 percent…

As the depression grew the President began to dismantle the huge federal bureaucracies built up during WW1. The Presidents slogan was “less government in business” as he opposed excessive governmental interference in the private sector of the economy and worked to control $25 billion of Federal debt. After taking office the President had said that government ought to “strike the shackles from industry .. We need vastly more freedom than we do regulation.”…

Then in 1923 the great depression ended when unemployment fell from the 1921 high of 11.9% to the pre 1920 levels of 3.2%. About now you are thinking I don’t remember the depression of 1920. Well neither did I, and now I know why.

The 1921 loss of half the value and price of all goods was horrendous. For comparison the loss of housing value in the last year is around 18%, lower in many areas and a bit higher in others. Even though it was worse than 1930 we don’t remember the 1920 depression because the President didn’t tinker with the economy and built the groundwork to allow quick recovery without wide spread damage.

That President? That was Warren G Harding. Harding “embraced the advice of Treasury Secretary Andrew Mellon and called for tax cuts in his first message to Congress on April 12, 1921. The highest taxes, on corporate revenues and “excess” profits, were to be cut. Personal income taxes were to be left as is, with a top rate of 8 percent of incomes above $4,000. Harding recognized the crucial importance of encouraging the investment that is essential for growth and jobs, something that FDR never did.”

Under Harding, GNP rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million, s reported 6.7 percent in 1922. Then fell again in 1923. So, just a year and a half after Harding became president, the Roaring Twenties were underway

h ttp://oregoncatalyst.com/2112-The-Other-Great-Depression.html

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