The Depression of 1920

I suggest everyone takes a look at this excellent piece that was done on the 1920-1921 depression by the The Market Oracle.

History rarely talks about the horrific depression that we had right before the roaring 1920's.  Unemployment rose to 12% and GDP contracted by 17% during this time.

The period preceding the 1920 financial crisis was filled with high government spending during WWI which of course was accompanied with cheap money.   Gee...Does this sound familiar?

In response to the 1920 financial meltdown, President Warren Harding cut government spending by 50% and lowered taxes which stimulated business growth.

The results of this "austerity" policy were nothing short of spectacular.  The deficit was reduced by 30% as a result of these actions.  The economy recovered within a couple years, and it helped trigger one of the most prosperous booms that this country has ever experienced. 

The speech below was given by our then President Warren Harding.  

"We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens but because it will be an example to stimulate thrift and economy in private life.
Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn't been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.

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."

The Bottom Line

Hear Hear President Harding!

As you can see above, the problems we face today are no different than before.  The answer is simple: Cut Spending!  The problem we face today is our government is much more corrupted by money and lobbyists.

Interestingly enough, the Fed back then actually stayed on the sidelines during this crisis. 

What's also interesting is the legacy of President Harding:

He is regarded as being a terrible president.  Perhaps the ivory towers had to paint a false portrait of a guy who wasn't bought and paid for by the financiers of his generation.

Let's hope we find another President Harding soon before the oligarchs destroy this country.