Conventional Wisdom of the 1920s and What Can We Learn

According to conventional wisdom, the 1920s were a time of dramatically reduced levels of government activity, both domestically and internationally. Harding and Coolidge are typically said to have been strict supporters of laissez-faire economics and of nonintervention in foreign affairs. Again however, the liberal historians have overstated their case.It is true that both domestically and internationally the 1920s represented a time of decreased government intervention when compared with the previous decade. But the previous decade, after all, included World War I. So although government spending and foreign involvement did indeed decrease in the 1920s when compared with the previous decade, they were both much higher than they had been before the war.

This is what economic historian Robert Higgs has called the ratchet effect: although government is inevitably scaled back in the aftermath of an emergency, it never reaches pre-emergency levels. Its scope, its spending, and its taxation are lower than during the emergency, but higher than before the emergency.


During World War I, the top income tax rate had been increased from 7 percent to an incredible 73 percent. Andrew Mellon, secretary of the Treasury under both Harding and Coolidge, believed that such suffocating rates were damaging the economy. He also believed that such a high rate was actually yielding less revenue to the federal government than would a lower rate. (Mellon thereby anticipated the argument of economist Arthur Laffer and his Laffer Curve, which gained attention in the late 1970s). The excessively high rates were causing the wealthy to shelter their incomes rather than expose themselves to such punishing taxation.

NOTE: This is what the wealthy will always do when some liberal idiot promises the nonproductive masses free stuff. The rich will protect their assets while the middle working class gets taxed up the yahoo. Lower Taxes benefit every one of all classes.

If they invested their money and did well, the federal tax code allowed them to keep twenty seven cents of every dollar earned, but if they invested their money and failed they would lose 100 cents of every dollar. No thanks, said many American.

A great many wealthy Americans were putting their money into tax free state and municipal bonds not an extraordinary lucrative avenue, of course, but they yielded at least some return, and they were not taxable. Meanwhile, businesses were starved for capitol. Money that might have been devoted to business investment was tied up in state bonds. The states were awash with cash to fund various projects of dubious merit, but the private sector was in trouble.

Mellon therefore considered tax relief essential to the nations economic health. Under his influence, rates were reduced across the board, for all tax brackets, throughout the course of the decade. The top rate, since it was so high saw the greatest absolute reduction, from 73 to 40 and later to 25 percent, but the greatest proportional reduction occurred in the lower income brackets, where people saw most of their income tax burden eliminated altogether.

As a result, not only did federal revenue actually increase the unfortunate aspect of Mellons policy but, much more important, economic activity multiplied many times over. These tax reductions undoubtedly played a role in bringing about the prosperity of the 1920s. In 1926, unemployment reached the incredible low of 1 percent.

No, Harding and Coolidge did not establish a Square Deal, a New Deal, a New Frontier, a Great Society, or a New Covenant. For the most part they simply stayed out of the economy and out of peoples lives.But the results speak for themselves. By the end of the decade, the United States could boast an incredible 34 percent of total world production, followed by Britain and Germany, each with just over 10 percent. No wonder historians hate Harding and Coolidge; these presidents success goes to show how much better off the country might be if ambitious politicians with their grandiose plans would just shut up and leave us alone.

It is next to impossible to imagine an unassuming man like Calvin Coolidge being elected today. He made no campaign promises to enrich some citizens at the expense of others through taxation or any other government program. He understood the damage that well-intentioned government programs can do, and he understood the limited nature of American government as envisioned by the Framers of the Constitution. Nothing could be further from the message heard from present day presidential candidates.

NOTHING IS EASIER THAN THE EXPENDITURE OF PUBLIC MONEY. It doesnt appear to belong to anyone. The temptation is overwhelming to bestow it on somebody.


Until Nex Time. God Bless you and God bless America