Friday, 12 August 2011

Guest Post: The Credit Downgrade That Didn't Happen

Following is a post by Dr. Burt Folsom, author of New Deal or Raw Deal?* and professor of history at Hillsdale College. It is reprinted in its entirety from Prof. Folsom's blog by his kind permission.
The Credit Downgrade That Didn’t Happen

by Dr. Burt Folsom

Ninety years ago, in 1921, the U. S. was poised for a recession, high unemployment, and a possible credit downgrade.


Because World War I had ended, the troops had come home, but 11.7% unemployment darkened the country. Our veterans could not find work. To solve these problems, some leaders recommended, in effect, a stimulus package–give the veterans jobs to build roads, bridges, and some buildings.

But President Harding (who died in office) and President Coolidge said no. Instead, these two presidents recommended cutting federal spending and cutting tax rates.

The cutting of federal spending was critical because the U. S. national debt had increased from $1.2 billion to $24.3 billion from 1916 to 1920.

We complain today about 9.1% unemployment and a doubling of our national debt in the last eight years; from 1916 to 1920, however, we had a 20-fold increase in the national debt and 11.7% unemployment.

But in early 1920s, the U.S. never had a credit downgrade or a prolonged recession because the cutting of federal spending and of tax rates jump-started the economy and produced budget surpluses every year during the 1920s.

During that decade we slashed more than one-fourth of our entire national debt, and increased GDP by almost 25%. American entrepreneurs eagerly began producing radios, talking movies, and air conditioning–three inventions, among others, that changed our nation and the world.

What is encouraging here is that Americans can still chart their own future. We did that in 1921, and we can do so today. We are not pre-destined to be a declining nation–we have a choice in that and we will help make that choice as a nation when we vote next year for the leaders who will shape public policy.

If we select someone with Coolidge’s free-market philosophy, then the freedom that comes with that will allow Americans to invent and create more goods and services to provide the jobs and prosperity to get America moving again.

Woodrow Wilson, the president who Harding and Coolidge replaced, promoted the first income tax and under Wilson the top rates went from 7% to 15% to 65%, and finally to 73%.

Under those rates, we were making the decision to chase wealth out of the country and stagnate as a nation. Harding and Coolidge reversed that decision and sent tax rates tumbling to 25% on top incomes.

American entrepreneurs arose and dominated the world. Revenue actually increased and budget surpluses became the hallmark of the 1920s. What choices will we make ninety years later?

*Dr. Folsom is also the author of The Myth of the Robber Barons and has a new book on FDR during WWII coming out in October!

Posted by Jeff Perren


  1. So everybody lived long and happily after... so if the got sorted in the twenties... why the crash in the early thirties?

  2. Dinther, because President Hoover then started intervening in the free market, massively, especially in labour relations. And after the crash Roosevelt's New Deal extended the effects of the crash by up to a decade.

    Go to and search 'Hoover Depression'. Read a smattering of the articles that show.

    Then read through the Mises Bailout Reader:

  3. Because Wilson jacked up taxes and Roosevelt introduced benefits for bludgers,

    There is - fundamentally - only one problem with NZ: that there are 3,500,000 people who should be starving in the gutter who aren't because of all the taxes paid by about 100,000 productive, high-value, high-net-worth individuals.

    Fix that imbalance, and every other problem will go away, basically overnight.

    And the problem can be fixed overnight, too: it would take less than 24 hours for cabinet to zero all benefit rates, and close state hospitals and schools and all the rest.

    And that's all it would take.

  4. Coolidge was one of the great conservatives of the 20th Century.


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