Sunday, July 4, 2010

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.


Anonymous said...

"this excellent peace"
"Here Here President Harding!"

Time for spell checking. :-(

Jeff said...

whoa changes will be made.


Herb said...

You need to read up on the Teapot Dome Scandal. By the time he died (rumors of his wife poisoning him!) the entire country was tired of him. Him and his "Ohio Gang" were the definition of corruption.

Jeff said...




Just checked that out.

Sounds pretty shady. Harding was actually very popular according to Wikipedia before he died in office.

One thing is for sure. The guy knew how to run a fiscally sound ship.

Nixon was thought to be one of our greatest presidents before he went down via watergate.

I guess corruption goes with the territory in DC. Just look at how bad it is today.

Herb said...

An interesting book to read about the 1920's is Only Yesterday: An Informal History of the 1920's by Frederick Lewis Allen ( ).

It was written in 1931, and the author's opinion of Harding is extremely low. In fact he has an entire chapter on the scandals.

His mind was vague and fuzzy. Its quality was revealed in the clogged style of his public addresses, in his choice of turgid and maladroit language ("non-involvement" in European affairs, "adhesion" to a treaty), and in his frequent attacks of suffix trouble ("normalcy" for normality, "betrothment" for betrothal). It was revealed even more clearly in his helplessness when confronted by questions of policy to which mere good nature could not find the answer. White tells of Harding's coming into the office of one of his secretaries after a day of listening to his advisers wrangling over a tax problem, and crying out: "John, I can't make a damn thing out of this tax problem. I listen to one side and they seem right, and then—God!—I talk to the other side and they seem just as right, and here I am where I started. I know somewhere there is a book that will give me the truth, but, hell, I couldn't read the book. I know somewhere there is an economist who knows the truth, but I don't know where to find him and haven't the sense to know him and trust him when I find him. God! what a job!"

Does he remind you of any recent president?

Jeff said...

"I know somewhere there is an economist who knows the truth, but I don't know where to find him and haven't the sense to know him and trust him when I find him. God! what a job!"

Looks like he got lucky and found an economist that he could trust.

He sounds like he was a crappy president but he had the balls to cut spending by 50% which turned the economy around.

I have come to the conclusion that all of these politicians are crooked.

I am sure Harding made a lot of enemies by slashing spending because he created a lot of pain for a lot of people when he forced the goverment tit to run dry.

I praise his economic policies even though he was a shady schuck.

It took a lot of balls to go out on a limb and slash spending.

Sounds like he paid the price for pulling the trigger because history does not remember him too fondly.

Herb said...

That 50% was back in the days before medicare, medicaid, social security, SEC, etc.

I wonder where the cuts occurred?

Jeff said...

Good question. I am sure pretty much everywhere to spread out the pain.

Putting up a great video now.

Awesome stuff.