Running Head: PRESIDENT HARDING’S STIMULUS PLAN

President Harding’s Stimulus Plan for the 1920’s Depression

Daniel W. Riordan

American InterContinental University

Running Head: PRESIDENT HARDING’S STIMULUS PLAN
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Abstract

Daniel Riordan explores the history of economic depressions, he demonstrate less government

intervention reduces the length of the depression. He focuses on the forgotten depression of the

1920 where President Harding cut taxes and reduced government spending in turn the economy

bounced back in a year. He will let history show the best course of action to quickly get out of a

depression is to reduce taxes and government spending which is the exact opposite this

administration and the last have enacted.

Running Head: PRESIDENT HARDING’S STIMULUS PLAN
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President Harding’s Stimulus Plan for the 1920’s Depression

When a country enters an economic depression there are three main approaches a

government may take. The first is to do nothing and let the economy self correct, second

approach is to cut government spending and reduce taxes and the third is to increase government

spending which in turn requires increasing in taxes (Johnson, 2009). Let history show the best

course of action to quickly get out of a depression is to reduce taxes and government spending

which is the exact opposite this administration and the last have enacted.

We will look at history to show the cause and effect on an economy when a government

tries to intervene. We will focus on the forgotten depression of 1920, President Warren Harding

cut the government budget nearly in half and tax rates were cut for all tax brackets what effect

did that have on the economy? We know the era that followed is known as the roaring twenties

and we know the Great Depression that lasted 12 years when President Herbert Hoover than

Franklin D. Roosevelt created government jobs and increased taxes.

In 1920 the unemployment rate 12% with a drastic decline in the gross national product

put the United States into economic distress. The United States had a GDP of 88.4 Billion in

1920 and it dropped to 73.6 Billion in 1921 a 17% decline, see appendix A. President Harding

did not listen to his advisors Herbert Hoover who was his Secretary of Commerce, at the time,

whom advocated fiscal stimulus. President Harding took the opposite approach and cut taxes

and government spending (Woods, 2009). In his 1920 acceptance speech to the Republican

presidential nomination, Harding declared:

“We will attempt intelligent and courageous deflation, and strike at the government

borrowing which enlarges the evil, and we will attach high cost of government with every energy

and facility which attend Republican capacity. We promise that relief which will attend the
Running Head: PRESIDENT HARDING’S STIMULUS PLAN
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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.”

By the summer of 1921 the cut in taxes stimulated a return to work as unemployment

declined to 6.7% and the GDP bounced back up to 85.4 billion (Chantrill, 2010). In Appendix B

you can see the average yearly total of unemployment at 6% or under till 1929 stock market

crash. Woods (2009) stated “The experience of 1920-21 reinforces the contention of genuine

free-market economists that government intervention is a hindrance to economic recovery”

(p.29). Johnson (2009) concluded “The same thing might have happened after the big Wall

Street crash in October 1929 if President Herbert Hoover had followed the advice of Andrew

Mellon, Secretary of the Treasury. Mellon remembered 1907 and 1920 and knew that a key to

capitalism is allowing badly run businesses to go bust in a down cycle. He told President Hoover

that the destructive forces unleashed by the crash should be left free to "liquidate labor, liquidate

stocks, liquidate the farmers, liquidate real estate [and so] purge the rottenness from the

economy” (p.27)."

It took 12 years with governments spending to overcome the stock market crash in 1929.

A government cannot act as fast as a true free market. Governments have too much bureaucracy
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to do anything quick. By cutting taxes President Harding put money into the general public

giving them the power to decide what to do with it. He knew that a government is not there to

solve every issue its citizens have but to allow them the freedom to solve it themselves. The

proof is in history let markets self correct and take out poorly ran companies.
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Appendix A

Total Spending
Fiscal Years
GDP-US Total Spending -fed
1910 to 1950
$ billion pct GDP
Year

1910 33.4 2.51 i

1911 34.3 2.57 i
1912 37.4 2.47 i
1913 39.1 2.48 a
1914 36.5 2.75 i
1915 38.7 2.71 i
1916 49.6 2.10 i
1917 59.7 3.86 i
1918 75.8 17.22 i
1919 78.3 24.13 i
1920 88.4 7.67 i
1921 73.6 7.49 i
1922 73.4 5.13 a
1923 85.4 4.35 i
1924 86.9 4.22 i
1925 90.6 4.00 i
1926 96.9 3.69 i
1927 95.5 3.70 a
1928 97.4 3.77 i
1929 103.6 3.68 i
1930 91.2 4.34 i
1931 76.5 5.37 i
1932 58.7 7.27 a
1933 56.4 9.05 i
1934 66 9.00 a
1935 73.3 10.30 i
1936 83.8 10.94 a
1937 91.9 9.58 i
1938 86.1 9.81 a
1939 92.2 10.04 i
1940 101.4 9.92 a
1941 126.7 11.18 i
1942 161.9 21.96 a
1943 198.6 41.78 i
1944 219.8 45.73 a
1945 223 47.93 i
1946 222.2 29.94 a
1947 244.1 16.96 i
1948 269.1 13.23 a
1949 267.2 15.04 i
1950 293.7 15.25 a
Legend:
i - interpolated between actual reported values
a - actual reporte

Chantrill, C. (2010). Time Series Chart of US Government Spending.

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Appendix B

Smiley, G. (2010). EH Net. The U.S. Economy in the 1920s.

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References

Chantrill, C. (2010). Time Series Chart of US Government Spending. Retrieved from

http://www.usgovernmentspending.com/downchart_gs.php?

year=1830_2010&view=1&expand=&units=p&fy=fy09&chart=F0-

total&bar=0&stack=1&size=m&title=&state=US&color=c&local=s

Johnson, P. (2009, September). Let Economies Cure Themselves. Forbes, 182 (3), 27-27

Smiley, G. (2010). EH Net. The U.S. Economy in the 1920s. Retrieved from

http://eh.net/encyclopedia/article/Smiley.1920s.final

Woods, T.E. (2009). Warren Harding and the forgotten depression of 1920. The Intercollegiate

Review.
Running Head: PRESIDENT HARDING’S STIMULUS PLAN
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Unit 3 General Essay Outline

Thesis – Let history show the best course of action to quickly get out of a
depression is to reduce taxes and government spending which is the exact
opposite this administration and the last have enacted.

I. Introduction – Discuss depression and there are three camps government

create jobs and pay money to stimulate the economy as they raise taxes to fund
their endeavors, do nothing. The other camp lowers taxes and cut government
spending allowing the market to self correct. Explain that this essay is to show
the opposite of what our current administration is doing.

II. Topic Sentence 1: Discuss starting point

1) 1920 Unemployment rate of 12%
2) GDP declined 17% 88.4 billion 1920 / 1921 73.6 b
3) Harding’s approach (cause)

III. Topic Sentence 2: Results in 1921

1) Unemployment down to 6.7
2) Unemployment down to 2.4 in 1923
3) GDP 1923 85.4 b

IV. Concluding Paragraph: This is just one example in history where

government needs to let economies cure themselves and if you have to do
something cut taxes and government spending.