The Depression of 1920-21, aka the Forgotten Depression, The Depression Youve Never Heard Of and the Overlooked Depression, was a sharp deflationary depression that took place between January 1920 and July 1921. So it lasted approximately eighteen months. Before the depression broke out, Woodrow Wilson had suffered a debilitating stroke, so he was incapable an active response. The Federal Reserve, rather than trying to put deflation under arrest and drive down interest rates, allowed them to rise from 4.2% to 7% between 1919 and 1920. Between 1920 and 1921, the national unemployment rate rose from 4.5% to 11.7%, wage-rates fell by 11%, wholesale prices fell by 38%, the Dow Jones Industrial Average fell by 50% and GNP fell by 17%. This was worse than the start of the Great Depression in which unemployment rose from 3.2% to 8.5% over a twelve month interval. Neither the federal government nor Federal Reserve tried to arrest price deflation. In November 1920, Warren G. Harding was elected in an historic landslide. The message of Harding was a Return to Normalcy and to resume the peacetime expansion the nation had enjoyed before the interruption elicited by entry into World War I. In his speech at the 1920 Republican National Convention he stated: 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. He added: 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. Between 1921 and 1922, the federal budget was cut nearly in half from $5 billion to $3.2 billion. Prior, between 1919 and 1920, the federal budget had been cut from $18.4 billion to $6.3 billion. So between 1919 and 1922, there was a cumulative budget cut of 82%. Instead of fiscal stimulus or jobs program, the Harding Administration simply opted to allow a natural return to full-employment. Taxes were reduced across the board with the top rate falling from 73% to 58%. Secretary of Treasury, Andrew Mellon, proposed an across the board tax reduction to spur economic growth. In Mellons view, if tax rates were too high, people would avoid paying them. So lower rates would encourage people to invest in taxable infrastructure and stimulate growth while broadening the tax base and raising revenue for federal coffers. By July 1921, signs of recovery were already in sight. The slow economy began to reverse itself. Unemployment dropped to 6.7% in 1922 and then to 2.4% in 1923. Tax receipts fell initially though the budget stay balanced and a national surplus was accrued. By 1924, tax receipts were up again as the economy came into full-swing. Although Harding died in late 1923, Calvin Coolidge continued his policy of slashing spending, balancing budgets and cutting taxes. The top tax rates were slashed from 58% to 46% to 25% by 1926. The bottom rate fell from 1.5% to 1.125%. The federal government would run a surplus each year during the Harding/Coolidge years, and unemployment would fall as low as 1.8%. One-third of the national debt was retired, and tax receipts increased by 61% between 1923 and 1929. In contrast to what modern economists tell us, the mostly laissez-faire response taken in 1920-21 actually expedited recovery and kicked off remarkable economic development and expansion. But didnt cutting taxes, cutting spending and a less active government role in the economy lead to the Great Depression? Historian Amity Shlaes, in her book The Forgotten Man points out how Herbert Hoover and Franklin D. Roosevelt caused and prolonged the Depression, respectively. Hoovers interfered during a market correction in 1929 and arrested falling wages with his advocacy of high money wage-rates which created a severe labor-market disequilibrium. Between 1929 and 1933, there was a sharp price deflation, so real-wages rose by 10%. He signed the largest protectionist tariff into law in 100 years, despite over 1,000 economists signing a petition against it, which caused a trade war with Europe and more than doubled the top tax rate from 25% to 63%. This turned what would have been a garden-variety recession into a world wide depression.
Posted on: Thu, 13 Nov 2014 06:29:40 +0000
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