The Forgotten Depression of the 20th Century

Most people have never heard of the Depression of January, 1920 - July, 1921.  There is a reason for this:  Unlike the Hoover-FDR "Great" Depression," which lasted from 1929 until World War II (and was predicted by many economists, politicians, and intellectuals to return following the war) and saw enormous amounts of Keynesian spending, Harding and Coolidge took the exact opposite approach.  They disproved the whole notion of Keynesianism and, for that reason, they must be erased from history.

* The 1920s started with extremely high tax rates and an economic depression.

* Tax rates were massively increased in 1917 on all income levels.

* 1918 saw another increase in all rates.

* Real GNP fell every year from 1919 to 1921 with a total fall of 16% over that three-year period.

* GNP declined 6.9%.

* 18% deflation.

* Wholesale prices fell by 36.8% (the worst since the Revolutionary War and worse than any year during the Great Depression).

* Unemployment spiked to 11.7%.

* The stock market fell by 47%.

* Business bankruptcies tripled.

* Business profits fell by 75%.

* Automobile production declined by 60%.

* Total industrial production declined by 30%.

To get the economy back on track and usher in a new era of prosperity, HARDING AND COOLIDGE CUT TAXES (Revenue Acts of 1921, 1924, and 1926).

To understand the potential revenue and economic effects of tax cuts, history is a extremely useful guide.  We can start by examining the effects of the 1920s tax rate cuts engineered by Treasury Secretary Mellon under Presidents Harding and Coolidge.

After five years of very high tax rates, rates were cut sharply under the Revenue Acts of 1921, 1924, and 1926. The combined top marginal normal and surtax rate fell from 73% to 58% in 1922, and then to 50% in 1923 (income over 200,000 dollars). In 1924, the top tax rate fell to 46% (income over 500,000 dollars). The top rate was just 25% (income over 100,000 dollars) from 1925 to 1928, and then fell to 24% in 1929.

Income Tax Receipts (millions)

Income…………………...1920……..……1922……..……1924……..……1926……..……1928….

5,000…………………..…..166……............96……….…….48………..……13……....……..13.…

5,000-10,000……………....98…………...…70……………..29…….…….…20……………...23.…

10,000-25,000………...….172………….…124…………..…78…………..…72………...……83….

25,000-100,000…….........318…….………270…………...246……..…..…254…….………331.…

100,000…………......…….321………….…302…….……..304……..……..373……….…...714.…

TOTAL……….…………..1,075…….………861……...……704……..……..732………….1,164....

Share of Total Income Taxes

Income…………………...1920……..……1922……..……1924……..……1926……..……1928….

Under 5,000……..……..15.4%.............11.1%..............6.8%...............1.8%..............1.1%....

5,000-10,000………...….9.1%...............8.1%..............4.1%...............2.7%..............2.0%....

10,000-25,000……....…16.0%.............14.4%............11.1%...............9.8%..............7.1%....

25,000-100,000….....…29.6%.............31.4%............34.9%.............34.7%.............28.4%....

Above100,000….....…..29.9%.............35.1%............43.2%.............51.0%.............61.3%....

Source:  US Department of Treasury, “Statistics of Income,” annual 1920 through 1928.

Following the tax cuts, the US economy grew rapidly in the 1920s.  The GNP averaged 7% from 1924 to 1929. Wages, profits, and productivity all made substantial gains during the 1920's.   Between 1922 and 1929, real GNP grew at an annualised rate of 4.7% and the unemployment rate fell from 6.7% to 3.2%. 

All boats were lifted.  Total income grew for many more people, who became more prosperous.  Between 1922 and 1928, the average income for those earning more than 100,000 increased by 15%, but the number of “rich” quadrupled.  In the same period, the number of taxpayers earning between 10,000 dollars and 100,000 dollars increased by a staggering 84% and the number of taxpayers reporting income of less than 10,000 dollars fell.

The 1920s started with extremely high tax rates and an economic depression.  Tax rates were massively increased in 1917 on all income levels.  1918 saw another increase in all rates.  Real GNP fell every year from 1919 to 1921 with a total fall of 16% over that three-year period.  As tax rates were decreased in the mid-twenties, tax revenues increased.

But tax rates are only part of the story.  Tax cuts increase revenue.  Spending more than total tax receipts will always lead to deficits.  Harding and Coolidge understood that government spending retards growth.  In 1920, Federal spending was 6.3 billion dollars.  Harding cut spending to 5 billion in 1920 and 3.2 billion in 1922.  

I have an idea. Why don't we compare the Depression of the early 1920s with the Depression of the early 1930s? 

I'll play for the Harding/Coolidge Team and, Progs, you can play for the Hoover/FDR Team.   Let's see who will fare better:

For the Harding/Coolidge Team:

* The combined top marginal normal and surtax rate fell from 73% to 58% in 1922, and then to 50% in 1923 (income over 200,000 dollars).

* In 1924, the top tax rate fell to 46% (income over 500,000 dollars).

* The top rate was just 25% (income over 100,000 dollars) from 1925 to 1928, and then fell to 24% in 1929.

* The GNP averaged 7% from 1924 to 1929.

* Between 1922 and 1929, real GNP grew at an annualised rate of 4.7% and the unemployment rate fell from 6.7% to 3.2%.

* Between 1922 and 1928, the average income for those earning more than 100,000 increased by 15%, but the number of “rich” quadrupled.

* In the same period, the number of taxpayers earning between 10,000 dollars and 100,000 dollars increased by a staggering 84% and the number of taxpayers reporting income of less than 10,000 dollars fell.

* Unemployment fell by more than 50% and by 1923, unemployment was 2.4%.

* But tax rates are only part of the story. Tax cuts increase revenue. Spending more than total tax receipts will always lead to deficits.

* Harding and Coolidge understood that government spending retards growth.

* Harding cut spending, which was 6.3 billion in 1920, to 3.2 billion in 1922.

* In 1920, the national debt was $25,952,456,406.16.

* In 1928, the national debt was $17,604,293,201.43.

* Even though tax rates were cut, the national debt decreased by $8,348,163,204.73 or 47.42%.

* Income increased, especially for the lowest tax brackets.

Your turn...