The American economic situation in 1920 is described by one historian as “grim”. The unemployment rate had tripled to 12% and Gross National Product had severely declined. President Warren Harding had at least one member in his cabinet agitating for “an array of interventions to turn the economy around.”[1] Harding opted to pursue a truly laissez-faire approach to allow the American economy to reset. Rather than use the government to boost spending outwardly, he “cut the government’s budget nearly in half between 1920 and 1922.”[2] Such inactivity has cast the economic depression of 1920 down the memory-hole as it has been dubbed “The Forgotten Depression.”

            This economic slowdown began at the conclusion of World War I. As an attempt toward a seamless transition, the Victory Loan was offered at “a generous 4.25% interest rate, the assurances of redeemability in gold, and a relentless public campaign that reached ever-more isolated tracts of the country.”[3] Despite those incentives, the government found few takers. In Arizona mining towns, for example, extraction had slowed since the war had ended. While they had been willing to lend money previously, postwar they had either “closed down” or were “(operating at) greatly reduced prices.” As prices adjusted from wartime to peacetime, these mines found themselves laying workers off as “consumer prices slumped for the first time in four years.”[4] The Victory Loan raised $4.4 billion, more than $2 billion less than the Liberty Loan had generated. It demonstrated “how much damage the war had done to American spending power.”[5]

            Further demonstrations of how the war had manipulated the economy were seen in the agricultural sector. Following the war, it was expected that American grain farmers would be able to freely export to any and every European country, yet it was surprised when “the wheat crop of 1919 sat unattended in grain elevators and dock facilities as exports fell.”[6] This occurred as farmers were forced to mechanize after many servicemen opted to find work in urban areas.[7] More than $100 million in loans were taken out, “two-thirds of those loans…were taken with a fully-owned home or buildings as collateral.” While World War I had helped to warp the market, farmers had “overleveraged themselves in response to production incentives of easy credit, legislative carveouts and…in price and production subsidies.”[8] It is within this state of interventionism that Warren Harding assumed the Presidency with “clearly expressed goals and objectives in speeches” that indicated a reduction in governmental involvement in the economy.[9]

            Harding opted in favor of a tactic that could be described as “old-fashioned.” He worked to head a government that minimized debt while likewise minimizing taxes and spending.[10] This was pursued at the onset of his administration. In his inaugural address he described his goal of “putting our public household in order,” by establishing “a rigid and yet sane economy.” This sanity would be fueled by “fiscal justice, and…by individual prudence and thrift.” He advised that further governmental influence would only further confuse the market forces. Rather than attempting to put any governmental thumb on the scale, Harding coaxed that “our best assurance lies in efficient administration of our proven system.”[11]

            This truly laissez-faire approach has confounded, potentially to the point of this economic depression receiving the moniker of being “forgotten.” One historian suggested that Harding’s faith in “our proven system” is so alien to the contemporary viewpoints on macro-economy management that economists “have been unable to explain how the recovery could have been so swift and sweeping.”[12] It is at the least an irony that Harding, though his established economic pillar insisting that “the federal government could not engineer economic prosperity” would potentially do just that once the United States had emerged from this depression. That engineering may have been done via a lack of oversight, though.

            It should be understood that the American economy was in pursuit of a correction following World War I. Private citizens and industries lacked the capital to invest in governmental reconstruction. Alternatively, the farming sector of the economy demonstrated how warped the economy had become as second mortgages attempted to finance stability. This want for stability had been created by public policy that had manipulated markets. The Forgotten Depression was both the productive of that manipulation and the pursuit of correction. Harding’s allowance for the correction to work itself out without further manipulation expertly navigated the depression into the memory hole.

Bibliography

Hebert, Terril. “The Limits of Financial Equity: The Federal Reserve, The Depression of 1921, and the End of Wilsonian Progressivism.” Order No. 30276698, Louisiana State University and Agricultural and Mechanical College (2022).

Moore, John A. “The Original Supply Siders: Warren Harding and Calvin Coolidge.” The Independent Review Vol. 18, No 4 (Spring, 2014): 597-618.

Woods, Tom. “Warren Harding and the Forgotten Depression of 1920.” CE Think Tank Newswire, April 6, 2020.

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[1] Tom Woods, “Warren Harding and the Forgotten Depression of 1920,” CE Think Tank Newswire, April 6, 2020.

[2] Ibid

[3] Terril Hebert, “The Limits of Financial Equity: The Federal Reserve, the Depression of 1921, and the End of Wilsonian Progressivism,” Louisiana State University and Agricultural and Mechanical College (2022), 57.

[4] Ibid 58

[5] Ibid, 59

[6] Ibid 68-69

[7] Ibid, 69-70

[8] Ibid, 72

[9] John A. Moore, “The Original Supply Siders: Warren Harding and Calvin Coolidge,” The Independent Review Vol. 18 No. 4 (Spring 2014), 599.

[10] Tom Woods, “Warren Harding and the Forgotten Depression of 1920,” CE Think Tank Newswire, April 6, 2020.

[11] John A. Moore, “The Original Supply Siders: Warren Harding and Calvin Coolidge,” the Independent Review, Vol. 18 No. 4 (Spring 2014), 601.

[12] Tom Woods, “Warren Harding and the Forgotten Depression of 1920,” CE Think Tank Newswire, April 6, 2020.