01 May 2009

Warren G. Harding and the depression of 1920-21

I've been doing some research for a pending post on how Roosevelt used the CCC during the Great Depression; today I ran across an article from The American Conservative describing how President Harding's administration addressed their recession. Stong disclaimer: I know NOTHING about Warren G. Harding or the depression of 1920-21. What I find interesting about the article (excerpted below) is how diametrically opposite Harding's approach was to the approach started by the Bush administration and being continued by the Obama administration...
...the depression of 1920-21, which most people have never heard of, is an example of the resumption of prosperity in the absence of government stimulus, indeed in the face of its very opposite...

During and after World War I, the Federal Reserve inflated the money supply substantially. Once the Fed finally began to raise the discount rate—the rate at which it lends to banks—the economy slowed as it started readjusting to reality... Harding elsewhere explained that wages, like prices, would need to come down to reflect post-bubble economic realities...

“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.”

"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."

Harding was true to his word, carrying on budget cuts that had begun under a debilitated Woodrow Wilson. Federal spending declined from $6.3 billion in 1920 to $5 billion in 1921 and $3.3 billion in 1922. Tax rates, meanwhile, were slashed—for every income group. And over the course of the 1920s, the national debt was reduced by one third...

The problem is not with an inadequate level of spending, but that in the wake of a central bank-induced boom, the capital structure is out of conformity with consumer demand. The recession is the period in which this mismatch is rectified through the reallocation of capital into more appropriate channels. Fiscal and monetary stimulus only interferes with and delays this purgative process.
I'm not taking a postion on this right now, because I have no expertise in macroeconomics, though I have often expressed in this blog my preference for smaller government and fiscal responsibility; I'm just not sure what interventions might be mandated by the egregious extent of the current economic crisis and the structural weaknesses that underlie it. I'm afraid the comment thread for this will quickly devolve into the Bush-haters vs. the Obama-haters pushing their political biases forward and striving to assign blame; I'd rather see a more informative discussion of economic theories. Still I wanted to post this, if for no other reason than to use it for referral for future posts.

4 comments:

  1. I'm just going to point out that this recession was followed by a bubble (the Roaring 20's) and then a serious bust (the Great Depression)...so maybe not the best model to follow on economic policy. I'm just saying.

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  2. I sure that the source has an axe to grind, so I'm taking this story with more then a grain of salt. The author barely discussed the root causes of that depression. There isn't much out there on this right now, but a few sources point to the fact that economic conditions were very different from both 1929 and 2008, mainly in 1920, the country still had a functional banking industry. I assume that allowed private finance to rearrange itself, therefore the government did not need to get involved.

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  3. There are some of us who are down on both GWB and BHO

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  4. Americans do not know or understand the US Banking System or it's agenda, This was meant to be so.

    In the speech entitled "A Time of Choosing" from 1964 by Ronald Reagan, we get a clear picture that his values and later his program as POTUS was to follow President Harding's example, as spelled out in an article in US News and World Report dated Jan 26,1981.

    Every POTUS since FDR to today is/was a FreeMason except for JFK and RR. Both were shot, one died. RR changed his economic program as he was released from the Hospital and was sworn in as a 33rd Degree Honorary FreeMason in the Oval Office.

    What else did JFK have common with Lincoln besides all those silly coincidences with Letters in their Names and their VP's?

    They both resorted to printing their own currency directly from the our own US Treasury and backed by US Silver, bypassing the foreign Owned Federal Reserve System of Banking we had been fighting with for over two hundred years.

    Great Depression? They caused it. It's called "consolidation of wealth" and they are doing it again right now using Americans as collateral as they assume control of all the World's Banks as well. What Conspiracy? Why is there a "Federal Reserve" when Congress has the power to print American Currency without interest on every note?

    Look up "Famous Quotes on the Federal Reserve" on "BarefootWorld" 's website.
    I leave the rest to all of you out there ....

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