As the end of Wilson's second term approached, the U.S. economy sunk into an economic depression. Wilson had led America through WWI, but he also increased the size of government and accumulated a huge debt in the process.
More precisely, the Depression of 1920 was caused by the following:
- War time expenditures- Obviously, this is something that Wilson did not have a choice in because the federal government is tasked with providing for the common defense of the country according to the Constitution.
- Monetary Policy- Due to the establishment of the Federal Reserve, mistakes were made when dealing with the economic crisis. Adjusting for the differences in time, inflation rising above 20%. The deflation that set in when the NY Fed raised its discount rate was more severe during this time frame than at any other point in American history including The Great Depression.
- Adjustment of the economy- At the end of the war, the economy needed to revert back to a peace-time basis and it took some time to do.
- Labor Unions- During the war, unions took advantage of the situation by demanding increased wages knowing that there was no other options for business and government because of the lack of a large work force.
Some of the economic conditions that came about due to the economic policies established by Wilson.
So, when Harding became president, he inherited a far worse situation due, in part, to the progressive economic policies of Wilson. So, Harding had to make decisions to address this situation.
Secretary of Commerce Hoover, another Progressive, urged Harding to implement a number of government interventions to turn the economy around. (Does this sound familiar to anyone?)
Harding had other ideas. One his campaign slogans was "Less Government in Business" which he immediately called for almost immediately upon taking office.
- Taxes on corporate revenues and excess profits were cut- This was an attempt to foster investment on the part of business which would in turn put people back to work.
- Income taxes were relatively unchanged- This makes sense in my mind. What good is it to raise income taxes when people did not have a job to begin with? That may be a simplistic view, but it is a logical one.
- Government spending was slashed mercilessly- (What is Obama asking for now? Another $50 billion. This is supposed to create jobs (again) and right the economy.)
- Other than that, Harding kept the government out of the way. He allowed the economy to quickly bottom out so it would then be able to start growing again.
How well did it work?
- The Depression of 1920 lasted about 18 months.
- Unemployment peaked at 11.7% in 1921 and dropped to an astoundingly low 1.8% in 1926.
- GNP rebounded to $74 billion in 1922.
This gave birth to The Roaring Twenties. A time where the U.S. saw the greatest expansion of the middle class as compared to any other point in its history. All amazingly accomplished without the help (better yet hindrance) of the federal government.