Weatherford Democrat

Viewpoints

September 28, 2012

COLUMN: The 1920s may hold key to our economy

— How many have heard of the great recession of 1920? To be quite honest I had not heard of it before, I read Dr. Thomas Sowell’s article An Economic Plan dated Sept. 11, 2012. I surmise that the reason that few people know about the event is because, as recessions go, it was over quite quickly. It will amaze you to know that the plan used by President Harding was very similar to the one proposed by Mitt Romney and Paul Ryan. Economist and politicians still argue about what caused the Great Depression. Herbert Hoover was the Secretary of Commerce in President Harding’s administration and wanted to pursue a different solution to the Depression problem, but the president rejected Mr. Hoover’s plan. When Mr. Hoover became president, he got the chance to try his solution to a depression, and now we know why President Harding rejected the plan.

Here are some statements from an article written by Thomas E. Woods Jr. in The Forgotten Depression Of 1920 (Nov. 27, 2009):

“The conventional wisdom holds that in the absence of government countercyclical policy, whether fiscal or monetary (or both), we cannot expect economic recovery — at least, not without an intolerably long delay. Yet the very opposite policies were followed during the depression of 1920–1921, and recovery was in fact not long in coming.

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.”

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