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June 28, 2011

The Depression of 1920. [ArthurK]

(Shamelessly Ripped from the Sidebar - Thank You Truman North)

We had two Depressions in the 20th Century.. Almost like a test - the Govt. dealt with each Depression in diametrically opposite ways. How'd that work out?


Here's a few paragraphs near the start of the linked essay.

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.

In the 1930s and today Hoover, Roosevelt and Obama tried Keynesian stimulus to deal with their Depression/Great Recession.


Let's skip to the end of the essay (Read The Whole Thing!) and have Harding sum it up for us.

This recipe of government austerity is precisely what Harding called for in his 1921 inaugural address:

We must face the grim necessity, with full knowledge that the task is to be solved, and we must proceed with a full realization that no statute enacted by man can repeal the inexorable laws of nature. Our most dangerous tendency is to expect too much of government, and at the same time do for it too little. We contemplate the immediate task of putting our public household in order. We need a rigid and yet sane economy, combined with fiscal justice, and it must be attended by individual prudence and thrift, which are so essential to this trying hour and reassuring for the future....

The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals. The normal balances have been impaired, the channels of distribution have been clogged, the relations of labor and management have been strained. We must seek the readjustment with care and courage.... All the penalties will not be light, nor evenly distributed. There is no way of making them so. There is no instant step from disorder to order. We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization. I would like government to do all it can to mitigate; then, in understanding, in mutuality of interest, in concern for the common good, our tasks will be solved. No altered system will work a miracle. Any wild experiment will only add to the confusion.* Our best assurance lies in efficient administration of our proven system.

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.

The experience of 1920-1921 reinforces the contention of genuine free-market economists that government intervention is a hindrance to economic recovery. It is not in spite of the absence of fiscal and monetary stimulus that the economy recovered from the 1920-1921 depression. It is because those things were avoided that recovery came.** The next time we are solemnly warned to recall the lessons of history lest our economy deteriorate still further, we ought to refer to this episode - and observe how hastily our interrogators try to change the subject.


*Contrast this with FDR's "Bold Persistent Experimentation"!

**I've been reading a lot on the Great Depression recently. You could argue that it only really came to an end after WWII! Unemployment dropped drastically after the war started - because millions of men were drafted and removed from the labor pool! And after the war there was tremendous industrial capacity in America and huge parts of the world to be rebuilt with it.

Consider what Harding did in 1921 and what the economic pundits say Cannot be done today. He cut the budget. They say we can't! His way worked. Their way didn't and won't.


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posted by Open Blogger at 04:34 AM

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