Posted by
Jack Fisher on Tuesday, July 07, 2009 2:17:57 PM
It was an economic downturn of vast proportions. The estimated gross national product fell 24 percent. The number of unemployed workers more than doubled. By any measure, it was a severe recession. But this wasn't the recession of 1929 or 2008. This was the recession of 1920.
Most people have never heard of this period. Many history books barely touch on it. Even those in the field of economics rarely mention it. Far more time is devoted to the gloom and doom of the Great Depression throughout the 1930s and the more recent downturn that began in 2008. So why was the depression of 1920 overlooked? There are many reasons, but the simplest is because it was over so quickly. It lasted a mere 18 months before the economy recovered and boomed again. It set the stage for the economic growth of the roaring 20s, arguably one of the most prosperous times in American history.
So what happened? How did the economy turn around so quickly? And why wasn't the turn-around as quick when another downturn occured in 1929? The answer is one of the great footnotes in American economic and political history. But it is a footnote many policy-makers would be wise to learn from.
At the time, Warren G. Harding was president. He came into office just in time for the downturn to hit. Such a downturn is usually a death sentance for any president (just look at Herbert Hoover). But unlike Hoover, Harding took a different course of action. Instead of pushing government programs or passing a stimulus package, he
cut taxes and he
cut spending.
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. In addition, the Federal Reserve didn't act in any significant way. They largely held steady and let the economy recover on it's own. And it did in a mere year and a half.
It is basically the opposite of what other great depression fighters like Franklin Roosevelt did and what Barack Obama is doing. By cutting spending and lowering taxes, capital is freed up and growth is allowed to resume. It follows the most basic of economic principles and history vindicates the lesser known Harding more than any of the so called 'great' presidents after him. They failed to heed his principles when the next depression hit. And instead of a swift turnaround, America entered the Great Depression which would last for over a decade. By interfering in the economy, overspending public money, and incurring more debt the downturn was worsened. History may not describe it so, but hard data tells the real story. Unemployment averaged nearly 17 percent throughout Roosevelt's long tenure while it reached a record low of 1.8 percent under Harding.
It is an unfortunate oversight of history that Harding's handling of a depression was so successful and all those that followed were so poor by comparison. That's not to say he deserves all the credit. In the downturns that followed the Federal Reserve played a larger role, rarely standing back and doing nothing like it did in 1920. But future presidents continued to make the same mistakes as Roosevelt. It is the very definition of insanity, doing the same thing again and again and expecting a different result. Only doing the same thing in this instance doesn't just fail to fix the problem, it makes it worse.
Barack Obama would be wise to follow the lessons of 1920. He would be wise to look at the bold actions of Warren G. Harding instead of Franklin Roosevelt. The potential for damage is much greater now than what it was in 1920. The old addage of not heeding history and being doomed to repeat is not only a lesson, it's a warning. And it's a warning Obama isn't heeding.