Ever hear of the Great Depression of 1920-21? Probably not. Most likely, that’s because it didn’t last very long; the method to get out of it involved less not more government; and the president who designed the policy was later buried by the Teapot Dome scandal.
Writers Thomas E. Woods, Jr. and Jim Powell—among others—have tried to restore Harding’s reputation, at least with respect to righting the economy.
As Woods puts it:
Few American presidents are less in fashion among historians than Harding, who is routinely portrayed as a bumbling fool who stumbled into the presidency. Yet whatever his intellectual shortcomings—and they have been grotesquely exaggerated, as recent scholars have admitted—and whatever the moral foibles that afflicted him, he understood the fundamentals of boom, bust, and recovery better than any 20th-century president.
Certainly, Harding inherited an economic mess from the vastly overpraised Woodrow Wilson. It was Wilson, after all, who brought us into World War I (after promising neutrality), created many federal bureaucracies, brought us income and inheritance taxes, put dissenters into prison, and incurred massive debt. And, yes, it was the fabled Wilson, whose racist bona fides somehow get a free pass, that allowed segregation of certain federal agencies.
Wilson’s newly created Federal Reserve inflated the money supply both during and after the war, and more tweaking by the Fed caused production to fall. As Powell reminds us, by mid-1920, it was down by 21 percent, with unemployment going from 2.1 million in 1920 to 4.9 million in 1921.
As Harding noted: “Gross expansion of currency and credit have depreciated the dollar just as expansion and inflation have discredited the coins of the world. We inflated in haste, we must deflate in deliberation. We debased the dollar in reckless finance, we must restore in honesty.”
While some in his administration, including Commerce Secretary Herbert Hoover, wanted significant government intervention, Harding actually cut spending—taking instead the advice of Treasury Secretary Andrew Mellon. Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Taxes also decreased. Yet, the federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.
Austrian tradition economist Benjamin Anderson, writing at the time, tells us that:
In 1920-21, we took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again….The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good.
Not surprisingly, the Keynesians could never understand this. Woods cites big deal economist Robert Gordon—”…government policy to moderate the depression and speed recovery was minimal. The Federal Reserve authorities were largely passive….Despite the absence of a stimulative government policy, however, recovery was not long delayed.”
Woods also cites economic historian Kenneth Weiher, who noted that “…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.” “…the economy rebounded quickly from the 1920-1921 depression and entered a period of quite vigorous growth.”
But, history tends to favor presidents who “do something,” whether that means starting a horrible civil war like Lincoln, intervening massively in an economy to absolutely no avail like FDR, or handling a crisis of his own making like JFK and the Cuban missiles.
I have a theory about this, by the way. Mainly, it is that the majority of historians are not very smart and are also lazy. Surely, it is easier to write about “action” than non-action, just as it is so much easier if one is a pop music critic to write about the lyrics rather than the music. Moreover, the historians invariably let their chronological biases get in the way.
Since all good liberals (and the vast majority of historians are liberal) “know” that the government must intervene to save an economy, why discuss what Harding did not do? Even though he personally had nothing to do with Teapot Dome, it did happen on his watch, and for that he definitely took his medicine.
Still, the public did not seem to care too much, as it reelected Coolidge, who initially took over after Harding died in office. In his second term, Coolidge got rid of Hoover, and kept Mellon.