THE FORGOTTEN DEPRESSION, 1920-1921

By Michael S. Coffman, Ph.D. and Kristie Pelletier
August 9, 2011
NewsWithViews.com
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Progressivism emerged in the late 1800s in the United States and led to the first major depression in the twentieth century from 1920-1921. Prosperity was restored in 1922 by doing exactly the opposite of what we are doing today. So why haven’t we heard of it?

Progressives believe in big government, big social programs, heavy taxation, and especially government control of as much as possible. The depression of 1920 was the result of this ideology. Known as the Forgotten Depression of 1920, it resulted from the progressive policies implemented by President Woodrow Wilson from 1913 to 1921. The $14.5 trillion debt today is the result of progressive control of Congress, the White House and the Judiciary since the days of ultra-progressive Franklin D. Roosevelt.

Wilson advocated what later became known as Keynesian economics. Keynesian economics is derived from the economic theories of John Maynard Keynes in the 20th century, who, during Wilson’s presidency and WWI, was considered a brilliant economist in the British Treasury. Keynesian economics is the model of choice by progressive Democrats and Republicans alike; including President Barack Obama.

The Keynesian theory argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and government must take control to ensure economic growth and stability. Intervention comes in the form of government spending and tax breaks in order to stimulate the economy; and government spending cuts and tax hikes in good times, in order to curb inflation. In short, it means government control.

Adherents to this philosophy believe that if the task of running the economy is given to them, they, and they alone can run the government smoothly, increase prosperity and avoid economic downturns that are so painful to society. That was a key justification for the creation of the U.S. Federal Reserve in 1913, also during Woodrow Wilson’s presidency.

Keynesian economics does not deliver what it promises. Just like President Obama today, President Wilson attempted to spend his way out of the depression by dramatically increasing federal spending and taxing the rich. Like Obama, he failed. The whiplash effect of Wilson’s wild increase in non-defense spending and tax increases resulted in the 1920-1921 depression. In 1913 federal spending was 2.0 percent of the Gross National Product (GNP); about the same as the preceding one hundred years. During the Wilson administration, it jumped to over 7 percent. At the end of Wilson’s tenure the non-defense federal budget was nearly 20 times higher than when he started. Wilson also raised the income tax rate from 7 percent to 73 percent for the rich to supposedly pay for it.

By 1920 unemployment had jumped to nearly 12 percent,[a] and GNP declined 17 percent – the same general pattern as experienced from 2008-2011. In spite of the Federal Reserve, or because of it, the economy was a disaster.

Warren Harding was elected President in 1921. His very anti-Keynesian methods took the boot off the throat of the American people by slashing taxes from 73% to 25% by 1925. Taxes were cut for lower income brackets starting in 1923. Harding also cut the government's budget nearly in half between 1920 and 1922. The results? The national debt was reduced by one-third. By 1922 unemployment was down to 6.7 percent and by 1923 it had dropped to 2.4 percent. The depression had vanished and The Roaring Twenties were launched.

It is difficult to emulate Harding’s success because progressive historians have reduced Harding’s miracle to a footnote in history books, if it is mentioned at all. Harding suffered from what is now a well-established strategy employed by progressives; demonize and marginalize anything and anyone who disagrees with the progressive view of reality. Incredibly, progressive historians usually label Harding ‘the worst president in history.’ Trapped in their own distortions of history, progressives are doomed to repeat the same failed policies over and over again.

When Harding died in office in 1923, Calvin Coolidge continued his free-market policies which fueled the Roaring Twenties. Progressives believe this huge prosperity is what caused the Great Depression of 1929; claiming that it was basically the result of unequal distribution of wealth.[1] This classic progressive anti-capitalist view of the cause of the Great Depression is now entrenched in the history books and has fueled the Keynesian economic theory of progressives since then. Yet, if this were true, we would be in a constant state of depression because most wealth has always been in the hands of the entrepreneurs. In contrast, wealth in communist or totalitarian countries is always in the hands of the ruling elite.

Much of the wealth in prosperous times is in the hands of those who are creating the wealth through increased capital investment and job creation. “In fact,â€