History Lesson Ignored

In 1920 the United States was in deep economic trouble. There was rising unemployment, business closures, falling demand, production cuts, bankruptcies and an astronomical national debt that rose from $1 billion to $24 billion as a result of World War I expenditures.
Republican presidential candidate Warren Harding’s platform centered around debt reduction, balancing the budget, lowering taxes and making the government smaller. Once he was elected President, Harding made two momentous appointments, both bankers. Andrew Mellon became Secretary of the Treasury and Charles D. Dawes became Director of the Budget Bureau. The latter department was established through the Budget and Accounting Act to coordinate the budgeting process. The purpose of the department was to get rid of the fat in the government bureaucracy and to reduce unnecessary expenditures. It was to be nonpartisan also.
By 1922, Harding’s Republican Administration balanced the budget, significantly reduced the federal debt, and cut the deficit. This was achieved by cutting federal spending and lowering taxes. Federal spending in 1920 was $6.3 billion. In 1921 it was reduced to $5 billion and then reduced again in 1922 to $3.3 billion. The Harding Administration eliminated the war’s excess profits tax, cut corporate taxes to 12.5% and reduced the tax on the wealthy to 58% from a high of 73%.
The result was an era of unprecedented prosperity. The nation recovered from the 1920 recession and private sector businesses boomed. Although Dawes resigned after a year, he put into place sound economic procedures that helped the nation through the remainder of the decade. Secretary of the Treasury Mellon continued to have Congress cut taxes again and again during the decade. Contrary to the Democratic politicians criticism that revenue would decrease, revenue increased to the point that for 7 out of 8 years there were surpluses; furthermore, the wealthy were paying the bulk of the taxes and not the middle and lower classes. It was the first supply-side economic plan in action.
Some critics claim that it led to the 1929 Stock Market Crash. Studies since 1949, beginning with Milton Friedman’s research, have demolished that claim. Within weeks after the crash the stock market was recovering. The recovery was stifled when President Hoover intervened and reversed many of the policies put into place by Mellon and Dawes. It was made worse when President Roosevelt applied the spend, spend Keynesian economic theories. Roosevelt’s policies of excessive federal spending (a stimulus he called pump priming), increased taxation, more government regulations, entitlement programs, etc. only deepened the depression. The nation never fully recovered from the Great Depression.
History is a good teacher. Unfortunately, most politicians didn’t pay attention to their history lessons. Dawes provided a warning that applies to politics today …” a President, if he is to save the country from bankruptcy and its people from ruin, must make the old fight over again, and this time the battle will be waged against desperate disadvantages. Against him will be arrayed the largest, strongest, and most formidably entrenched army of interested government spenders, wasters, and patronage-dispensing politicians the world has yet known.”
Source: Ronald Radosh and Allis Radosh

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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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