Warren G. Harding, Where Are You?

 | Sep 14, 2011 | 11:00 AM EDT
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"Even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist."

--John Maynard Keynes

In the wake of yet another stimulus plan -- bound to be impotent, in my view -- the punditocracy is finally starting to ask why we aren't examining history and looking for economic recovery plans that worked, rather than recycling Keynesian theories that were ineffective the first time around and have continued to be ineffective. I find it ironic that John Maynard Keynes is now the long-dead economist that informs economic policy decisions across the globe. His record of policy success is, well, dismal.

In contrast, we are starting to see some analysis of the policy responses to one of the worst economic contractions in modern history. I'm not talking about the Great Depression of the 1930s, but the lesser-known Great Depression of 1920. Following the end World War I, world economies collapsed. In the U.S., gross national product fell 24%, unemployment surged tripled to 12% and prices deflated by more than 50%. This was a collapse of epic proportions, far worse than our experience today. And this was in 1920, modern times by any definition. We had a Federal Reserve, liquid stock markets, radio, automobiles and mass transportation. The period cannot be dismissed as being irrelevant to the way things are today.

Despite the severity of the collapse, unemployment was below 3% and the economy was booming just three years later. Warren Harding was president, industrialist Andrew Mellon was his Treasury secretary and Herbert Hoover was his Commerce secretary. Fortunately for the people of that generation, Harding took the advice of Mellon and ignored the advice of Hoover, who pushed the same Keynesian government intervention ideas that would later cause him to prolong the Great Depression as president.

Harding took radical action: He cut the federal budget in half over two years and paid down a third of the national debt, all while cutting tax rates for all income groups. Further assisting the effort, the Federal Reserve took no action whatsoever, leaving money-supply growth unchanged.

The only U.S. president to take action remotely close to this was Ronald Reagan, whose policies gave birth to a two-decade economic boom. Policy prescriptions of this direction, if not magnitude, would be DOA in Washington today. Yet, look at the results. Within two years, unemployment was gone and the Roaring Twenties were in full gear. There was no stimulus, no zero interest rate policy and no deficit spending -- there was just a reduction of the burden of government and an unshackling of American private enterprise. Shocking!

So the question remains, why is it so difficult today to emulate past success?

We take failed policies, implement them in size, and when they don't work, we blame it on the policy action not being larger. A $1.5 trillion deficit is not enough? It should be $3 trillion! Fourteen trillion dollars in federal debt is not enough? Let's go for $30 trillion! More of the same policies will bring more of the same results. How sad that a generation may be condemned to economic malaise because our leaders are enamored with a long-dead, bon vivant economist, articulate and charismatic, yet full of bankrupt ideas.

Where is the next Warren Harding when we need him?


  • A tip of the hat to master market strategist Bill King for pounding the table on this idea. Many RealMoney contributors consider him a must-read.
  • To learn more, read The Forgotten Depression of 1920 by Thomas E. Woods Jr., or check out the Ludwig von Mises Institute and the Cato Institute.

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