Impact of tax cuts and government spending cuts in 1920s

Are you aware that… The US came out of the 1919-1920 depression when Secretary of the Treasury Andrew Mellon got Congress to do the following: repeal the excess profits tax, lower the corporate tax, and cut in half the personal income tax. Mellon convinced Harding and Coolidge to also cut expenditures for every department of the federal government. Cut spending, cut taxes!

The net result was a federal budget that had surpluses every year of the decade, a substantial portion of the national debt paid off and a booming economy. Why? Many democrats feared at the time that by cutting taxes, government revenues would decrease; however, Mellon argued these measures would increase government revenues and benefit the average worker and consumer also. He stated that if you put more money into the pockets of people, they would spend it creating demand in the private sector of the economy. This would then cause corporations to expand to meet the demand. As a result of increased demand, there would be more investments, higher productivity, more jobs and lower prices. He was absolutely correct. As individual earnings increased and corporate profits increased, government revenues went up with the prosperity. In addition, by the end of the decade the rich paid a higher proportion of the total tax bill than they had in 1920.


About camden41

Retired public school administrator Retired history professor: Taught Western Civilization, American Civil War, United States History, Economic History, Ancient & Medieval Foundations, American History Since 1945
This entry was posted in Uncategorized and tagged , , , , , , . Bookmark the permalink.

2 Responses to Impact of tax cuts and government spending cuts in 1920s

  1. tabonsell says:


    The increase in the GDP was a result of consumers rushing into the market after going years without being able to buy little more than the bare necessities of life. The public had built up huge amounts of spendable cash during the war.

    It was major cuts to government spending in 1919-20 that brought on the crash of 1920–21 and the consumers using money accumulated during the war that ended the recession. Taxes were cut later on in the 1920s and each cut preceded another recession.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s