Sunday, August 8, 2010

Two approaches for solving depression. Pick one.

Depression of 1920-1921 (duration about 18 months)

When President Harding assumed office on March 4, 1921 the United States was in the midst of a post war economic depression. By 1920, unemployment had jumped up to 12 percent and the GNP had dropped by 17 percent. Harding ignored Secretary of Commerce Herbert Hoovers recommendation for proactive federal intervention; rather Harding cut tax rates for all groups, including the reduction of the top rate from 75% to 25%. His efforts to reduce the national debt also involved cutting Government spending by 50% over the next 2 years. The resultant climate of low Government spending and low taxes allowed the private sector the room it needed to add jobs at a rate not seen in modern times. Recovery began to take place in summer of 1921; by 1922 unemployment receded to 6.4 percent; by 1923 the unemployment rate was 2.4 percent. The continuation of his policies by his Vice President Calvin Coolidge, after his death (only 2 years into his Presidency) laid the foundation for the era known as the "Roaring Twenty's", and by 1926 unemployment had reached a record low of 1.8%, the lowest ever recorded in peacetime. Economist Benjamin Andersen writes,

"In 1920–21 we [the U.S.] took our losses, we readjusted our financial structure, we endured our depression, and in August 1921 we started up again. . . . The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good.”

By Contrast

The Great Depression of 1930-1941 (duration 11+ years)

7 years after President Franklin Delano Roosevelt started the New Deal, in an effort to increase jobs during the period of depression, spending more borrowed government money than ever before, creating over 15 brand new government agencies to handle all the spending, creating a huge government debt, increasing taxes, his very own Secretary of Treasury shared these following words:

“We have tried spending money. We are spending more than we have ever spent before, and it does not work. And I have just one interest, and now if I am wrong, somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I saw after eight years of this administration, we have just as much unemployment as we started - and an enormous debt to boot.”

Henry Morgenthau, Franklin Delano Roosevelt’s Secretary of the Treasury

1941- Japan attacks Pearl Harbor. US manufacturing increased to supply the war effort and the employment required to satisfy all the war effort needs began and eventually pulled the US out of the depression that had been prolonged by government spending and government intervention.

So here we are in 2010, $700 Billion for Wall Street, $780 Billion for ARRA, $13 Trillion in debt, $1.4 Trillion budget deficit and unemployment at about 10%.

Is the current Administration and Congress trying to prove that Roosevelt was right? Or are they trying to prove that he was wrong? Either way they are spending lots of your money attempting to prove something. Perhaps they should try the 1920 approach that resulted in the quickest recovery and highest employment in the history of our country.
 Now that’s an idea.

Tom Peters
Average American
Ashland, NH

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