Tabonsell challenge

Challenge to “Impact of tax cuts and government spending cuts in the 1920’s”
Last week I received a comment from tabonsell who runs a liberal blog. His comments are as follows:
“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 1920’s and each cut preceded another recession.”
My response to the first paragraph is partially true with the first sentence and false to the second sentence. The second paragraph is just false. I wrote to tabonsell asking where he obtained his facts. There was no response after a week.
I have used information from the Economic History Association and A New Economic View of American History by Jeremy Atack and Peter Passell as my primary sources because they are more specific.
The first sentence was partially true because there was rationing imposed by the government during the war to conserve resources; however, there was no reduction in the production of consumer goods during the war. The government did have things like wheatless Mondays and meatless Fridays as a way of stretching out resources to help the war effort. These measures certainly did not reduce the civilian population to the bare necessities of life.
The second sentence about the accumulation of “huge amounts of spendable cash” has no creditable foundation because taxes were increased during the war. The Income Tax Amendment became law in 1913 with the highest rate being 7%. During the war, the highest rate was elevated to 77%. So taxes took away a portion of personal income which would have reduced savings.
According to the Economic History Association, the 1920-21 recession was caused by several factors. First, steel, coal and railroads strikes by unions were a major factor. Coal was still the principal source of energy and heating for homes. Railroads were still the principal transportation system for the nation. The strikes in these industries affected homes, factories and small businesses throughout the nation. This was one of the reasons why union membership declined in the 1902’s since it negatively impacted the finances of the nation.
Second, the Federal Reserve Banking system tightened the money supply by raising the discount rate charged to member banks three times from 4% to 7% by June 1, 1920. When the Federal Reserve Banks tightened their discount rates, it meant the member banks had to charge higher interest rates on loans. This caused businesses and people not to seek loans because they were too expensive. Economic historians agree that the discount rate was too high for too long causing the nation to go into a severe recession.
Third, during the war the government purchased a multitude of items on credit which created major debt and a growing deficit. The revenues from taxes and bonds did not cover all of the war expenses. Even with the tax rate on the richest people at 77%, the government could not significantly pay down the debt or decrease the deficit. It is this historic example and the high tax rates imposed during the Great Depression that validate the Republican Party’s stand that taxing the rich does not solve the debt crisis or close the deficit gap.
The second paragraph will be dealt with in another posting.


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
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