When we look back through American history, there are quite a few presidents who are held in high regard for their economic contributions. Leaders like Andrew Jackson, FDR, and Ronald Reagan are held in high regard by their supporters for being the standard-bearers for their economic policies. Because of that, the three of them are generally fare favorably in historical polls grading American presidents. However, there is one president who might be relatively anonymous to most Americans, but was still extremely successful when it came to his economic policy. This man is Warren G. Harding.
Unlike the prior three presidents mentioned here, Warren Harding differs from them in that he is generally regarded as being one of the worst presidents in American history. After his early death in 1923, Harding was exposed for having extramarital affairs and for playing a big role in the Teapot Dome scandal that led to the resignation of the Secretary of the Interior. While scandals and corruption have lowered Harding’s regard in the eyes of historians, it is still important to explore other aspects of his presidency. More specifically, many economists could benefit from looking at President Harding’s policies in the face of one of the worst recessions in American history.
Contrary to popular opinion, the year with the sharpest fall in business activity was not 1929, it was 1920. In the follow-up to World War I, the rise in production from the war was met with the fall in demand that came with peace, and a very sharp deflationary recession soon ensued. Economic activity sank, and so did production, and it was a fiscal emergency for Harding to deal with upon entering office. Harding acted by calling in a special congressional session and proposing plans to cut the income tax significantly.
It was a tough policy battle to get the tax cuts passed, however. There were debates within the Cabinet, and the Secretary of the Treasury, Andrew Mellon, took a strong stance in support of the tax cuts, and proposed cutting the top tax rate of 73% to 25%. To convince Congress to approve these plans, Mellon commissioned studies to show that a lower tax rate would incentivize more business activity and in turn, higher tax revenues. The tax cut was eventually passed, and the economy in the 1920s took off, sparking the Roaring Twenties.
Apart from that, the government largely stayed out of the economy, and did not micromanage private enterprise through heavy taxation and regulation. The response to the 1920 depression was considered to be the first true example of supply-side economics in action, which later became popularized by President Reagan. It was also arguably the last major recession without any significant interference by the federal government. There was no flood of stimulus or new regulations like in the Great Depression and the Great Recession, and there was also no major change in monetary policy as there was in the early 1980s. Since the Federal Reserve was still only seven years old at the time, they didn’t have very many tools in their arsenal.
But perhaps the best tool to use in a recession is the one that the government doesn’t have in its pocket. Despite 1920 being such a down year for the economy, and one that hit a record in terms of currency deflation, the economy bounced back almost immediately, and by the summer of 1921, the US was out of recession and on its way to one of the largest periods of peacetime economic growth in history. By not interfering too heavily in the economy and instead allowing citizens and businesses to be in charge of their own money, there was more efficient allocation of resources, and more economic growth. The standard of living for Americans rose dramatically, to the point where cars, which used to be only available to the very rich, became mass produced by the millions and available to the average American.
A significant amount of credit has to go to President Warren Harding for his decisions (and non-decisions) in response to the Depression of 1920. Instead of following through with the Wilsonian policies of stringent taxation (75% income tax) and heavy regulation and control over business (which crushed the once almighty railroad industry of the US). Though Harding is a president with many faults that ultimately damaged his standing among both American historians and the American people, it is still important to acknowledge the successes that he did have, and to recognize how his free market policies helped improve the economic well-being of the country and the quality of life of its citizens. The work of his successor Calvin Coolidge to continue build upon those policies led to unreached levels of economic prosperity.
Unfortunately, the responses to the Great Depression by his successors Herbert Hoover and Franklin Roosevelt were far more interventionist and Keynesian than that of Harding, and as a result, it took the economy twelve years and a world war to recover, and it took until 1954 for the Dow Jones index to finally reach its 1929 levels. When grading economic recoveries, the length of the recovery must be taken into account, and to spark immediate and robust economic recovery on the back of a historically deep recession and deflation should be praised, recognized, and more importantly, referenced in case of future economic crisis.
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