Very few people have heard of the Forgotten Depression of the 1920’s that affected the US from 1920 to 1921. Despite the severity of the depression economic growth was quickly restored thanks to the actions of President Warren G. Harding. Rather than intervening in the markets to try to stimulate demand, Harding let free-market forces cleanse and reset the system.
In contrast to the Forgotten Depression of the 1920’s, everyone has heard about the Great Depression of the 1930’s, and the steps President Roosevelt took to bring about an economic recovery. It’s a widely held belief that it was the policies Roosevelt enacted in his “New Deal” that either caused, or accelerated, the economic recovery. However the evidence provided by the Forgotten Depression of the 1920’s completely discredits this view.
In March 1921 the newly elected President, Warren G. Harding, took over from his predecessor, Woodrow Wilson, inheriting a serious mess. The country was in a depression with record unemployment, massive debt and a bloated and inefficient federal government. The Federal Reserve was printing money, the stock market was on its way to losing half its value, and the top tax rate was 77%. The economy was on the verge of collapse, but rather than embarking on massive stimulus and attempting to pump the economy full of cheap money, Harding did the opposite.
Between 1920 and 1922 Harding cut the federal budget in half, he cut income tax rates, not only for top rate tax payers but for all groups. Eighteen months later the American economy rebounded, allowing the national debt to be reduced by one third. The result of Harding’s Laissez-faire policies was the “Roaring Twenties”, a term used to refer to a period of sustained economic prosperity.
Sadly, President Harding died of a heart attack two years into his presidency, but his successor, Calvin Coolidge, continued what Harding had started.
“I want the people of America to be able to work less for the government and more for themselves. I want them to have the rewards of their own industry. This is the chief meaning of freedom. Until we can reestablish a condition under which the earnings of the people can be kept by the people, we are bound to suffer a very severe and distinct curtailment of our liberty.” Calvin Coolidge.
Limited government and free enterprise fuelled one of the greatest periods of success in American history, and yet, just nine years later the policies of Herbert Hoover and Franklin D. Roosevelt with their big government and massive spending programmes led the country into the Great Depression. The truth is, far from helping to bring about the recovery, the New Deal, with its high taxes and massive welfare programs, prolonged the Great Depression.
The problem however, is that it’s FDR’s policies that are serving as the blueprint for most of the world’s governments as they attempt to tackle today’s Great Recession.
As Thomas E. Woods explains, “We never hear a thing about the Forgotten Depression of the 1920’s for obvious reasons; we might draw the wrong conclusions. We might conclude that maybe these policies could be implemented today, and we’re not allowed to draw that conclusion so this episode is simply left off the table.”
It’s seems then, that we are doomed to repeat the mistakes of the past, even though the solution to today’s ongoing economic malaise is right there in the history books.